**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**
| **(Mark One)**                                                                                                              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** |
| **x**                                                                                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                        |
| **For the  quarterly period ended March 31, 2007**                                                                          |
|                                                                                                                        |
| **or**                                                                                                                      |
|                                                                                                                        |
| **o**                                                                                                                       | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                        |
| **For the  transition period from                to** |

 

**CommissionFile Number 000-50405**

**ACUSPHERE,INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                                     |   | **04-3208947**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |   | (IRS Employer  Identification No.) |
|                                                             |   |                               |
| **500  Arsenal Street**                                          |   | ** **                         |
| **Watertown,  Massachusetts**                                    |   | **02472**                          |
| (Address of  principal executive offices)                        |   | (Zip Code)                         |

 

Registrant’sTelephone Number, Including Area Code: **(617)648-8800**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large acceleratedfiler o           Accelerated filer x           Non-accelerated filer o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b 2 of theExchange Act). Yes o  No x

As of May 7, 2007 therewere 38,481,154 shares of the registrant’s common stock, $.01 par value pershare, outstanding.

 

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**ACUSPHERE,INC.**

**Form10-QFor the Quarterly Period Ended March 31, 2007**

**CONTENTS**
| PART I: FINANCIAL INFORMATION                                                                        |   | 3      |
|------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.  Consolidated Financial Statements                                                           |   | 3      |
| Consolidated  Balance Sheets:                                                                        |   | 3      |
| March 31, 2007  (Unaudited) and December 31, 2006                                                    |   |   |
| Consolidated  Statements of Operations (Unaudited):                                                  |   | 4      |
| Three  Months ended March 31, 2007 and 2006                                                          |   |   |
| Consolidated  Statements of Cash Flows (Unaudited):                                                  |   | 5      |
| Three  Months ended March 31, 2007 and 2006                                                          |   |   |
| Notes to  Consolidated Financial Statements (Unaudited)                                              |   | 6      |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |   | 16     |
| Item 3.  Quantitative and Qualitative Disclosure about Market Risk                                   |   | 31     |
| Item 4. Controls  and Procedures                                                                     |   | 31     |
| PART II: OTHER INFORMATION                                                                           |   | 32     |
| Item 1. Legal  Proceedings                                                                           |   | 32     |
| Item  1A. Risk Factors                                                                               |   | 32     |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                 |   | 47     |
| Item 3.  Defaults Upon Senior Securities                                                             |   | 47     |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         |   | 47     |
| Item 5. Other  Information                                                                           |   | 47     |
| Item  6. Exhibits                                                                                    |   | 47     |
| Signature                                                                                            |   | 49     |

 

2

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**PART I:FINANCIAL INFORMATION**

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

**ACUSPHERE, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands except share data)**
| ** **                                                                                                                                                                                                                                                                                                                             | ** ** | **As of**           | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                             | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                             | ** ** | **(unaudited)**          | ** ** | ** ** | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                                        |       |                     |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                                             |       | $                        | 47,395     |   | $ | 59,750 |   |
| Other current  assets                                                                                                                                                                                                                                                                                                                  |       | 1,012                    |       | 841 |   |
| Total current  assets                                                                                                                                                                                                                                                                                                                  |       | 48,407                   |       | 60,591 |   |
|                                                                                                                                                                                                                                                                                                                                   |       |                     |       |   |   |
| PROPERTY AND EQUIPMENT,  at cost:                                                                                                                                                                                                                                                                                                      |       |                     |       |   |   |
| Property and  equipment                                                                                                                                                                                                                                                                                                                |       | 54,597                   |       | 54,507 |   |
| Less accumulated  depreciation and amortization                                                                                                                                                                                                                                                                                        |       | 24,538                   |       | 22,054 |   |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                           |       | 30,059                   |       | 32,453 |   |
|                                                                                                                                                                                                                                                                                                                                   |       |                     |       |   |   |
| OTHER ASSETS                                                                                                                                                                                                                                                                                                                           |       | 1,699                    |       | 1,778 |   |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                                                           |       | $                        | 80,165     |   | $ | 94,822 |   |
|                                                                                                                                                                                                                                                                                                                                   |       |                     |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                         | ** ** | ** **               | ** ** | ** ** | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                                                   |       |                     |       |   |   |
| Current portion  of long-term obligations                                                                                                                                                                                                                                                                                              |       | $                        | 11,849     |   | $ | 12,899 |   |
| Current portion  of deferred revenue                                                                                                                                                                                                                                                                                                   |       | 2,667                    |       | 2,667 |   |
| Derivative  liability                                                                                                                                                                                                                                                                                                                  |       | 218                      |       | 59 |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                       |       | 1,157                    |       | 2,615 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                       |       | 4,200                    |       | 4,085 |   |
| Total current  liabilities                                                                                                                                                                                                                                                                                                             |       | 20,091                   |       | 22,325 |   |
| LONG-TERM LIABILITIES:                                                                                                                                                                                                                                                                                                                 |       |                     |       |   |   |
| Long-term  obligations, net of current portion                                                                                                                                                                                                                                                                                         |       | 9,999                    |       | 9,381 |   |
| Deferred  revenue, net of current portion                                                                                                                                                                                                                                                                                              |       | 4,000                    |       | 4,667 |   |
| Total long-term  liabilities                                                                                                                                                                                                                                                                                                           |       | 13,999                   |       | 14,048 |   |
| COMMITMENTS                                                                                                                                                                                                                                                                                                                            |       |                     |       |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                                                                                                                             |       |                     |       |   |   |
| Preferred stock,  $0.01 par value per share                                                                                                                                                                                                                                                                                            |       | 7                        |       | 7 |   |
| Authorized -  5,000,000 shares as of March 31, 2007 and December 31, 2006; Designated 6.5%  convertible exchangeable - 1,000,000 shares as of March 31, 2007 and  December 31, 2006; issued and outstanding 730,000 shares as of March 31,  2007 and December 31, 2006 (liquidation value $36,500,000 as of March  31, 2007) |       |                     |       |   |   |
| Common stock,  $0.01 par value per share                                                                                                                                                                                                                                                                                               |       | 381                      |       | 381 |   |
| Authorized,  98,500,000 shares as of March 31, 2007 and December 31, 2006; issued and  outstanding 38,138,558 shares as of March 31, 2007 and 38,090,593 as of  December 31, 2006                                                                                                                                                 |       |                     |       |   |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                            |       | 339,343                  |       | 339,224 |   |
| Deferred  stock-based compensation                                                                                                                                                                                                                                                                                                     |       | —                   |       | (22 | ) |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                   |       | (293,656                 | )          | (281,141 | ) |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                       |       | 46,075                   |       | 58,449 |   |
| TOTAL                                                                                                                                                                                                                                                                                                                                  |       | $                        | 80,165     |   | $ | 94,822 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

3

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**ACUSPHERE, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(unaudited, in thousands)**
| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| ** **                                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                        |       |                             |       |   |   |
| COLLABORATION  REVENUE                                      |       | $                                | 667        |   | $ | 857 |   |
|                                                        |       |                             |       |   |   |
| OPERATING  EXPENSES:                                        |       |                             |       |   |   |
| Research and development                                    |       | 9,988                            |       | 10,873 |   |
| General and administrative                                  |       | 3,220                            |       | 2,554 |   |
| Total operating expenses                                    |       | 13,208                           |       | 13,427 |   |
|                                                        |       |                             |       |   |   |
| Interest income                                             |       | 721                              |       | 476 |   |
| Interest expense                                            |       | (535                             | )          | (480 | ) |
| Change in  valuation of derivative                          |       | (160                             | )          | (879 | ) |
| NET LOSS                                                    |       | $                                | (12,515    | ) | $ | (13,453 | ) |
|                                                        |       |                             |       |   |   |
| Dividends on  preferred stock                               |       | (593                             | )          | (601 | ) |
| NET LOSS  AVAILABLE TO COMMON STOCKHOLDERS                  |       | $                                | (13,108    | ) | $ | (14,054 | ) |
| NET LOSS  AVAILABLE TO COMMON STOCKHOLDERS PER SHARE – |       |                             |       |   |   |
| Basic and  diluted                                          |       | $                                | (0.34      | ) | $ | (0.61 | ) |
| WEIGHTED-AVERAGE  SHARES   OUTSTANDING –     |       |                             |       |   |   |
| Basic and diluted                                           |       | 38,111                           |       | 22,888 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

4

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**ACUSPHERE, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited,in thousands)**
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| ** **                                                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (12,515    | ) | $ | (13,453 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                             |       |   |   |
| Stock-based  compensation expense                                            |       | 672                              |       | 683 |   |
| Depreciation and  amortization                                               |       | 2,525                            |       | 2,588 |   |
| Noncash interest  expense                                                    |       | 220                              |       | 290 |   |
| Noncash rent  expense                                                        |       | 13                               |       | 26 |   |
| Noncash  amortization of deferred revenue                                    |       | (667                             | )          | (857 | ) |
| Noncash  amortization of fee and warrants to financial advisor               |       | 52                               |       | 67 |   |
| Noncash change  in valuation of derivative                                   |       | 160                              |       | 879 |   |
| Changes in  operating assets and liabilities:                                |       |                             |       |   |   |
| Deferred revenue                                                             |       | —                           |       | 510 |   |
| Other current  assets                                                        |       | (171                             | )          | (367 | ) |
| Accounts payable                                                             |       | (1,458                           | )          | (2,214 | ) |
| Accrued expenses                                                             |       | 115                              |       | (1,040 | ) |
| Net cash used in  operating activities                                       |       | (11,054                          | )          | (12,888 | ) |
|                                                                         |       |                             |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                             |       |   |   |
| Purchases of  property and equipment                                         |       | (131                             | )          | (316 | ) |
| Decrease in  other assets                                                    |       | 9                                |       | 16 |   |
| Net cash used in  investing activities                                       |       | (122                             | )          | (300 | ) |
|                                                                         |       |                             |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |       |                             |       |   |   |
| Payments on  long-term obligations                                           |       | (1,203                           | )          | (991 | ) |
| Proceeds from  long-term obligations                                         |       | 554                              |       | 1,407 |   |
| Payment of  preferred stock dividends                                        |       | (593                             | )          | (601 | ) |
| Proceeds from  exercise of stock options                                     |       | 35                               |       | 80 |   |
| Proceeds from  issuance of common stock from employee stock purchase plan    |       | 28                               |       | 28 |   |
| Net cash used in  financing activities                                       |       | (1,179                           | )          | (77 | ) |
|                                                                         |       |                             |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                   |       | (12,355                          | )          | (13,265 | ) |
|                                                                         |       |                             |       |   |   |
| CASH AND CASH  EQUIVALENTS, Beginning of period                              |       | 59,750                           |       | 51,112 |   |
| CASH AND CASH  EQUIVALENTS, End of period                                    |       | $                                | 47,395     |   | $ | 37,847 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

5

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**ACUSPHERE,INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

**1.  Basis of Presentation**

The accompanying unaudited consolidated financialstatements of Acusphere, Inc. and Subsidiaries (the “Company”), have beenprepared in accordance with generally accepted accounting principles in theUnited States of America for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles in the United States of America for completefinancial statements. These statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’slatest audited annual financial statements. Those audited statements areincluded in our Annual Report on Form 10-K for the year ended December 31,2006, which has been filed with the SEC.

In the opinion of management, all adjustments,consisting only of normal, recurring adjustments considered necessary for afair presentation of the results of these interim periods have been included.The results of operations for the three months ended March 31, 2007 may not beindicative of the results that may be expected for the full fiscal year.

The Company is subject to a number of risks similar tothose of pre-commercial stage companies, including dependence on keyindividuals, uncertainty of product development and generation of revenues,dependence on outside sources of capital, risks associated with clinicaltrials, dependence on third party collaborators for research operations, needfor regulatory approval of products, successful protection of intellectualproperty, and competition with larger, better-capitalized companies.  Successful completion of the Company’sdevelopment program and, ultimately, the attainment of profitable operations isdependent on future events, including obtaining adequate financing to fulfillits development activities and achieving a level of revenues adequate tosupport the Company’s cost structure. There are no assurances, however, that the Company will be able toobtain additional financing on favorable terms, or at all, or successfullymarket its products. See Item IA of Part II of this Quarterly Registration Form10-Q “Risk Factors.”

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amountsof expenses during the reporting period. Actual results could differ from thoseestimates or assumptions. The more significant estimates reflected in thesefinancial statements relate to revenue recognition, accrued expenses, embeddedderivatives, and valuation of stock-based compensation.

**2.  Revenue Recognition**

The Company recognizes revenue from license arrangements in accordancewith Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) andFinancial Accounting Standards Board (“FASB”) Emerging Issue Task Force IssueNo. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF00-21”). The Company recognizes revenue from license payments not tied toachieving a specific performance milestone ratably over the period over whichthe Company is obligated to perform services. The period over which the Companyis obligated to perform services is estimated based on available facts andcircumstances.  The Company periodicallyevaluates the assumptions underlying these estimates; significant changes inthese assumptions could result in an adjustment to the period over which therevenue is recognized. The Company recognizes revenue from performancepayments, when such performance is substantially in the Company’s control andwhen the Company believes that completion of such performance is reasonablyprobable, ratably over the period over which the Company estimates that it willperform such performance obligations. Substantive at-risk milestone payments,which are based on achieving a specific performance milestone when performanceof such milestone is contingent on performance by others or for whichachievement can not be reasonably estimated or assured, are recognized asrevenue when the milestone is achieved and the related payment is due, providedthat there is no substantial future service obligation associated with the milestone.Revenue in connection with license arrangements is recognized over the term ofthe arrangement and is limited to payments collected or due and reasonablyassured of collection. In circumstances where the arrangement includes a refundprovision, the Company defers revenue recognition until the refund condition isno longer applicable unless, in the Company’s judgment, the refundcircumstances are within its operating control and unlikely to occur.  Payments received in advance of beingrecognized as revenue are deferred. Contract amounts which are not due until the customer accepts orverifies the research results are not recognized as revenue until customeracceptance, assuming collectibility is reasonably assured.

6

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**3.  Accounting for Stock-based Compensation**

***Summary ofStock-Based Compensation Plans***

In June 2005, the2005 Stock Option and Incentive Plan (the “2005 Plan”) was approved. The 2005Plan became effective on June 16, 2005 and provides that a maximum of 1.7million shares of common stock may be issued as incentive stock options (“ISO’s”),nonqualified stock option, awards of common stock and direct purchases ofcommon stock by Acusphere employees, officers, directors and consultants. Themaximum number of shares that may be granted to any employee under the 2005Plan shall not exceed 1.0 million shares of common stock during any calendaryear. Options granted have a term of 10 years and generally vest over fouryears. The Company settles employee stock option exercises with newly issued shares.  As of March 31, 2007, there were 1.5 millionoptions outstanding under the 2005 Plan, and 0.2 million shares available forfuture stock and option grants.

In July 2003, the2003 Stock Option and Incentive Plan (the “2003 Plan”) was approved. The 2003Plan became effective on the closing of the Company’s IPO on October 14,2003 and provides that a maximum of 2.5 million shares of common stock may beissued as ISO’s, nonqualified stock option, awards of common stock and directpurchases of common stock by Acusphere employees, officers, directors andconsultants. The maximum number of shares that may be granted to any employeeunder the 2003 Plan shall not exceed 583,334 shares of common stock during anycalendar year. Options granted have a term of 10 years and generally vestover four years. The Company settles employee stock option exercises with newlyissued shares. As of March 31, 2007, there were 2.3 million options outstandingunder the 2003 Plan and 0.2 million shares available for future stock andoptions grants.

In July 2003, the2003 Employee Stock Purchase Plan (the “Purchase Plan”) was approved whichbecame effective on the closing of the Company’s IPO on October 14, 2003.The Purchase Plan provides for the issuance of a maximum of 233,334 shares ofcommon stock. Eligible employee may contribute up to 10% of their total cashcompensation with a maximum of 417 shares semi-annually. The first sale ofshares under this plan occurred on February 29, 2004. During the firstquarter of 2007, 12,234 shares of common stock were sold to employees underthis plan. Acusphere had 194,951 shares available for future sales ofcommon stock under this plan at March 31, 2007.

In March 1994, the1994 Stock Plan (the “1994 Plan”) was approved. The 1994 Plan, as amended,provided that a maximum of 1,423,663 shares of common stock could be issued asISOs, nonqualified stock options and stock grants. The Company ceased grantingawards under the 1994 Plan after March 7, 2004. As of March 31, 2007,there were 1.0 million options outstanding under the 1994 Plan.

Under the fair valuerecognition provisions of SFAS 123R, stock-based compensation cost is measuredat the grant date based on the fair value of the award and is recognized asexpense over the service period, which generally represents the vesting period.The grant date fair value of stock options is calculated using theBlack-Scholes option-pricing model and the grant date fair value of restrictedstock is based on intrinsic value. The expense recognized over the serviceperiod is required to include an estimate of the awards that will be forfeited.

All stock-based awards tonon-employees are accounted for at their fair market value in accordance withFAS 123R and Emerging Issues Task Force No. 96-18, *Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services*. Under thismethod, the equity-based instrument was valued at either the fair value of theconsideration received or the equity instrument issued on the date of grant.The resulting compensation cost was recognized and charged to operations overthe service period, which was usually the vesting period.

Stock compensation expenseunder SFAS 123R for the first quarter of 2007 and 2006 is as follows (inmillions):

|                              | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| General & administrative |       | $                                                    | 0.3        |   | $ | 0.4 |   |
| Research & development   |       | 0.3                                                  |       | 0.3 |   |
| Total                        |       | $                                                    | 0.6        |   | $ | 0.7 |   |

 

7

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In accordance withFAS 123R, the Company will report any excess tax benefits from theexercise of non-qualified stock options as financing cash flows.  There were no excess tax benefits recordedfrom the exercise of non-qualified stock options for the three months endedMarch 31, 2007.

For purposes of recordingstock option-based compensation expense as required by SFAS 123R, the fairvalues of each stock option granted under the Company’s stock option plan forthe three months ended March 31, 2007 were estimated as of the date ofgrant using the Black-Scholes option-pricing model. The weighted average fairvalue of all stock option grants issued for the three month period ended March31, 2007 and 2006 was $1.28 and $2.32, respectively.

For purposes of recordingEmployee Stock Purchase Plan (“ESPP”) compensation expense as required byFAS 123(R), the fair values of each share subject to purchase under theESPP was estimated as of the beginning of the ESPP period using theBlack-Scholes option-pricing model. 

The fair values of allstock option grants issued were determined using the following weighted averageassumptions: 

|                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Risk-free interest rate                 |       | 4.8                                                  | %          | 4.6 | % |
| Expected volatility of underlying stock |       | 50.0                                                 | %          | 36.6 | % |
| Expected life of  option grants (years) |       | 5.0                                                  |       | 5.0 |   |

 

The fair values ofoptions granted during six-month subscription period ended February 28, 2007and 2006 under the Company’s Purchase Plan were calculated using the followingweighted-average assumptions:

|                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Risk-free interest rate                 |       | 5.1      | %          | 4.8      | %          |
| Expected volatility of underlying stock |       | 49.8     | %          | 37.0     | %          |
| Expected life of ESPP  shares (years)   |       | 0.5      |       | 0.5      |       |

 

The risk-free rates forthe stock option plan and ESPP are the weighted average of the yield rates on5-year U.S. Treasury notes on the dates of the stock option grants and theyield rates on 6-month U.S. Treasury bills at the inception of eachquarterly ESPP period, respectively. The dividend yield of zero is based on thefact that the Company has never paid cash dividends and has no presentintention to pay cash dividends. The Company used the historical volatility ofthe Company’s market-traded stock for the expected volatility assumption inputto the model.  

As share-basedcompensation expense is recognized based on awards ultimately expected to vest,compensation expense is reduced for estimated forfeitures.  SFAS 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. Forfeiture rates arecalculated based on actual historical forfeitures.

The expected life ofemployee stock options represents the weighted-average period the stock optionsare estimated to remain outstanding. The expected life of employee stockoptions is, in part, a function of the options’ remaining contractual life andthe extent to which the option is in-the-money (i.e., the average stock priceduring the period is above the strike price of the stock option). The Companyestimates that, based on these variables, options are likely on average to beexercised in approximately 5 years.  Theoption life for options under the Purchase Plan is six months, representing thetime period under which the option may be exercised as defined in the plan.

During the three monthsended March 31, 2007, the Company granted stock options to existing employees,as part of the Company’s performance review process, new employees andDirectors in lieu of cash based compensation. All such options were grantedwith exercise prices equal to the current market value of the underlying commonstock on the date of grant. Aggregate stock options granted during 2007 are asfollows:
| ** **                                  | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted Average** | ** ** | ** **          | ** ** |
|---------------------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------------|------------|---------------------|------------|
| ** **                                  | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** | **Exercise Price**   | ** ** | ** **          | ** ** |
| ** **                                  | ** ** | **Shares**         | ** ** | **Per Share**      | ** ** | **Per Share**        | ** ** | **Fair Value** | ** ** |
| For the three  months ended March 31, 2007: |       | 965,080            |       | $2.45 - $2.70           |       | $                         | 2.61       |                | $          | 2,517,191 |   |
|                                             |            |                    |            |                         |            |                           |            |                     |            |  |  |

 

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On February 28, 2007, thecompany issued 12,234 shares of its common stock under the Purchase Plan at$2.31 per share, reflecting 85% of the closing stock price.

***Stock Options***

Under the Company’spolicies for granting stock options to employees, employees who receive newstock option grants typically receive these grants in the early part of eachyear in connection with the Company’s annual employee performance andcompensation review process. As a result, the level of stock options granted bythe Company is typically the highest during the first fiscal quarter of eachyear.  The following table summarizes thestock option activity in the equity incentive plans from January 1, 2007through March 31, 2007:

|                                            | ** ** | **Number of  Shares** | ** ** | **Exercise Price  Per Share** | ** **        | **Weighted-  Average  Exercise  Price Per  Share** | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|-----------------------------------------|-------------------|---------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Balance, January  1, 2007                  |       | 3,961,118                  |       | $                                       | 0.84 - $13.02     |                                                    | $          | 5.96                                                 |       |                            |       |   |   |
| Granted                                    |       | 965,080                    |       | 2.45 - 2.70                             |              | 2.61                                                    |       |                                                 |       |                            |       |
| Exercised                                  |       | (30,253                    | )          | 0.84 - 1.26                             |              | 1.15                                                    |       |                                                 |       |                            |       |
| Canceled                                   |       | (129,454                   | )          | 0.84 - 8.50                             |              | 6.24                                                    |       |                                                 |       |                            |       |
| Balance,  March 31, 2007              |       | 4,766,491                  |       | $                                       | 0.84 - $13.02     |                                                    | $          | 5.31                                                 |       | 8.0                             |       | $ | 25,290,260 |   |
|                                       |       |                       |       |                                    |              |                                                    |       |                                                 |       |                            |       |
| Vested or  Expected to Vest March 31, 2007 |       | 4,529,323                  |       | $                                       | 0.84 - $13.02     |                                                    | $          | 5.31                                                 |       | 8.0                             |       | $ | 24,210,258 |   |
| Exercisable, March 31,  2007               |       | 2,323,983                  |       | $                                       | 0.84 – 13.02 |                                                    | $          | 6.10                                                 |       | 7.0                             |       | $ | 14,167,688 |   |

 

The followingtable summarizes information related to the Company’s options at March 31,2007:
|                         | ** ** | ** **         | ** ** | **Outstanding**                              | ** ** | **Weighted** | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|-------------------------|------------|--------------------|------------|----------------------------------------------|------------|--------------|------------|--------------------|------------|--------------|------------|
| ** **              | ** ** | ** **         | ** ** | **Weighted-Average**                         | ** ** | **Average**  | ** ** | **Exercisable**    | ** ** | **Average**  | ** ** |
| ** **              | ** ** | **Number of** | ** ** | **Remaining**                                | ** ** | **Exercise** | ** ** | **Number**         | ** ** | **Exercise** | ** ** |
| **Exercise Price** | ** ** | **Shares**         | ** ** | **Contractual Life (in Yrs)** | ** ** | **Price**    | ** ** | **of Shares** | ** ** | **Price**    | ** ** |
|                    |       |               |       |                                         |       |         |       |               |       |         |       |
| $ 0.00 - 1.30      |       | 385,524            |       | 5.5                                          |       | $            | 0.84       |               | 385,524    |         | $          | 0.84 |   |
| 1.31 - 2.60             |       | 930,613            |       | 9.4                                          |       | 2.56         |       | 89,010             |       | 2.19         |       |
| 2.61 - 3.91             |       | 460,000            |       | 9.5                                          |       | 3.25         |       | 136,474            |       | 3.50         |       |
| 3.92 - 5.21             |       | 287,900            |       | 8.4                                          |       | 4.83         |       | 160,847            |       | 4.84         |       |
| 5.22 - 6.51             |       | 1,655,740          |       | 8.3                                          |       | 5.82         |       | 714,736            |       | 5.85         |       |
| 6.52 - 7.81             |       | 275,719            |       | 6.1                                          |       | 6.98         |       | 203,718            |       | 7.11         |       |
| 7.82 - 9.11             |       | 269,149            |       | 6.9                                          |       | 8.74         |       | 210,236            |       | 8.75         |       |
| 9.12 - 10.42            |       | 218,500            |       | 6.9                                          |       | 9.59         |       | 172,723            |       | 9.59         |       |
| 10.43 - 13.02           |       | 283,346            |       | 6.4                                          |       | 13.02        |       | 250,715            |       | 13.02        |       |
|                    |       | 4,766,491          |       | 8.0                                          |       | $            | 5.31       |               | 2,323,983  |         | $          | 6.10 |   |

 

The total cash receivedfrom employees as a result of employee stock option exercises during thethree-month period ended March 31, 2007 was approximately $35,000. 

As of March 31, 2007, theaggregate intrinsic value of fully vested and exercisable options is$14.2 million.

As of March 31, 2007,there was $4.5 million of total expected unrecognized compensation costrelated to unvested stock options granted under the Company’s stock-basedcompensation plans. That cost is expected to be recognized over aweighted-average period of 2.8 years.

**4.  Net Loss Per Common Share**

Basic and diluted net loss per common share iscalculated by dividing the net loss available to common stockholders by theweighted-average number of unrestricted common shares outstanding during theperiod. Diluted net loss per common share is the same as basic

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net loss per common share, since the effects ofpotentially dilutive securities are anti-dilutive for all periods presented. Asof March 31, 2007 and 2006, anti-dilutive securities, which consist ofconvertible exchangeable preferred stock, stock options, warrants, andrestricted common stock that are not included in the diluted net loss per sharecalculation aggregated 16,834,277 and 10,630,728 shares, respectively.

The following table reconciles weighted-average commonshares outstanding to the shares used in the computation of basic and dilutedweighted-average common shares outstanding:

|                                                                      | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** |
| Weighted-average  common shares outstanding                          |       | 38,111,105                       |       | 22,888,979 |   |
| Less weighted-average  unvested restricted common shares outstanding |       | —                           |       | (1,008 | ) |
| Basic and diluted  weighted-average common shares outstanding        |       | 38,111,105                       |       | 22,887,971 |   |

 

**5. Property and Equipment**

Property and equipment at cost consist of thefollowing (in thousands): 
|                                                  | ** ** | **As of:**                 | ** ** | **Estimated  Useful Life** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **March 31, 2007**                     | ** ** | **December 31, 2006** |
| Equipment                                        |       | $                               | 23,001     |                            | $          | 22,993 |   | 3 –  5 years |   |
| Furniture and  fixtures                          |       | 424                             |       | 424                             |       | 5  years |   |
| Leasehold  improvements                          |       | 31,064                          |       | 31,030                          |       | Lease  term (a) |   |
| Sub-total depreciable assets                     |       | 54,489                          |       | 54,447                          |       |   |   |
| Less:  accumulated depreciation and amortization |       | (24,538                         | )          | (22,054                         | )          |   |   |
| Total depreciable assets, net                    |       | 29,951                          |       | 32,393                          |       |   |   |
| Deposits on  equipment purchases                 |       | 108                             |       | 60                              |       | N/A |   |
| Total property  and equipment                    |       | $                               | 30,059     |                            | $          | 32,453 |   |   |   |

 

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(a) The Company depreciates leasehold improvements and equipment undercapital leases over the lesser of their useful lives or the remainder of theirrespective lease terms.

Leaseholdimprovements primarily represent costs incurred for the build-out of theCompany’s commercial manufacturing facility in Tewksbury, Massachusetts, whichare being depreciated over the remaining initial lease term. Deposits onequipment purchases generally represent progress payments made for long-leadtime capital equipment purchases. Depreciation on leasehold improvements tothis commercial manufacturing facility commenced upon the latter of completionof the improvements or October 2005, at which time the Company received anoccupancy permit and began operating use of the facility.  Included inleasehold improvements at March 31, 2007 and 2006, prior to accumulateddepreciation and amortization, is capitalized interest in the amount of$813,000 related to the construction of the facility.

**6.   Intellectual Property**

The Company expensesintellectual property costs incurred in obtaining license rights and patentsrights to technology or products for which technological feasibility has notbeen commercially demonstrated and no alternative future use has been shown toexist.  No amount has been capitalized by the Company relating to thecosts of intellectual property developed or acquired by the Company.

On June 1, 2006, theCompany entered into an agreement to license on a non-exclusive basis variousultrasound-related intellectual property from GE Healthcare (“GE”), a divisionof General Electric Company. In consideration of the non-exclusive license ofthese patents, the Company agreed to pay GE $10.0 million prior to commercialapproval of Imagify, of which $5.0 million was paid in June 2006 and $5.0million is due in June 2007, which is included in current portion of long-termobligations.  In addition, the Companyagreed to pay GE $5.0 million upon the commercial approval of Imagify (definedas the first to occur of the approval of a New Drug Application in the UnitedStates or the approval of a Marketing Authorization Application in Europe) and$5.0 million upon the one year anniversary of such commercial approval.  The latter two $5.0 million payments arecontingent upon achievement of future milestone events and, accordingly, havenot been recorded at this time.  Foraccounting purposes the Company has not demonstrated technological feasibilityor an alternative future use for these patents. Therefore, $9.5 million was expensed upon the consummation of theagreement, representing the initial $5.0 million June 2006 payment and thepresent value of the $5.0 million payment due in June 2007.

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On May 11, 2005, theCompany entered into a Patent Transfer Agreement with Bayer Schering Pharma AG(“Schering”) pursuant to which the Company acquired rights, title and interestin certain ultrasound-related patents from Schering. In consideration of thetransfer and assignment of these patents, the Company agreed to pay Schering atotal of $7.0 million of which $1.0 million was paid in May 2005, $3.0million was paid in May 2006, and $3.0 million was due in May 2007.Effective April 27, 2007 the Company entered into an amendment (the “Amendment”)to the Patent Transfer Agreement.  The Amendment provides that, in lieu ofthis final $3.0 million payment in May 2007, the Company shall make a series ofpayment due as follows: $1.5 million on or before fifteen days followingexecution of the Amendment; $1.0 million on or before fifteen days after May11, 2008; and $1.0 million on or before fifteen days after May 11, 2009. The effect of the Amendment was to decrease current liabilities byapproximately $1.5 million, which was reclassified from current to long-termliabilities; there was no impact on the results of operations.  For accounting purposes the Company has notdemonstrated technological feasibility or an alternative future use for thesepatents and the present value of this acquisition cost, $6.2 million, wasexpensed in May 2005 at the time of acquisition.

**7. Long-term Obligations**

The carrying value oflong-term obligations is as follows:
|                              | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                         |       |                         |       |                            |       |
| Capital lease  obligations   |       | $                            | 87         |                            | $          | 93 |   |
| Notes payable                |       | 13,867                       |       | 14,485                          |       |
| Other long-term  obligations |       | 7,894                        |       | 7,702                           |       |
|                         |       | 21,848                       |       | 22,280                          |       |
| Less current  maturities     |       | (11,849                      | )          | (12,899                         | )          |
| Long-term obligations,  net  |       | $                            | 9,999      |                            | $          | 9,381 |   |

 

***Capital Lease Obligations***

The Company leasescapital equipment through Banc of America Leasing Corporation. The remainingmonthly payments range from $460 to $1,019 with maturities throughJune 2010. Interest rates for the above leases range from 7.3% to 9.4%.Acusphere does not have any additional borrowing availability under these leasearrangements as of March 31, 2007. At March 31, 2007 and December 31, 2006, the cost and net carryingvalue of equipment under capital leases amounted to approximately $87,000 and $93,000.

***Notes Payable***

***Equipment Promissory Notes—*** InApril 2004, the Company entered into an equipment financing line withGeneral Electric Capital Corporation. In 2004 and 2005, the Company borrowed anaggregate of $10.5 million against this line. As of March 31, 2007, net ofrepayments, the Company had $6.9 millionoutstanding under this line. In January 2006, the line was amended and theavailability was increased by an additional $3.5 million and was extendedthrough May 2007. During the first quarter of 2007, the Company borrowedapproximately $0.6 million and, subject to the terms and conditions of theagreement, has approximately $1.4 million, of this additional $3.5 million,remaining available at March 31, 2007. Borrowings are collateralized by equipment and other capital purchasesmade with the proceeds from these notes, with repayment due in monthlyinstallments over 36 to 48 months, depending on the nature of the equipmentfinanced, with the last such repayment scheduled for October 2010. Interest rates on these borrowings werefixed at the time of each borrowing and range from 8.7% to 10.7%. The loansunder this line are subject to acceleration upon the occurrence of certainevents of default, including failure to timely pay principal and interest.

In June 2005, theCompany entered into a $7.0 million equipment financing line with OxfordFinance Corporation. In 2005 the Company borrowed an aggregate of $7.0 millionagainst this line. As of March 31, 2007, net of repayments, the Company had$4.7 million outstanding under the line. Borrowings are collateralized bycorresponding qualified purchases with repayment due in monthly installmentsover 36 to 48 months, depending on the nature of the equipment financed,with the last such repayment scheduled for March 2010. Interest rates on theseborrowings were fixed at the time of each borrowing and range from 10.3% to10.9%. No additional amount may be borrowed under this line.

***Facility Loan Agreement—***InAugust 2004, Acusphere entered into a loan with MassDevelopment underwhich up to $2.0 million of financing is available upon completion byAcusphere of certain tenant improvements to its commercial manufacturingfacility in Tewksbury, Massachusetts. Interest accrues under the loan at 5.0%per annum with retroactive adjustments to 9.0% in the event the Companyachieves positive operating cash flow, as defined in the agreement, prior torepayment of the loan. The repayment of

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principal and accruedinterest coincides with the term of the Tewksbury lease at the time of theloan, the term of which was five-years, nine-months with options to extend thelease for up to two additional five-year terms. The Company is scheduled tobegin loan repayments in May 2007. Unpaid interest during this twenty-fourmonth period is accrued and principal and accrued interest shall be repaid on amonthly basis thereafter such that the total amount outstanding shall fullyamortize over the balance of the term in equal installments. The loan issubject to acceleration upon certain customary events of default, includingfailure to timely pay principal and interest. In the first quarter of 2005, theCompany borrowed $2.0 million under this agreement, secured by certainimprovements made at the Tewksbury facility. As of March 31, 2007,Acusphere has $2.0 million outstanding under this financing arrangement, andhas accrued interest payable of approximately $0.2 million related to thisloan.

The retroactive interestrate adjustment feature of the loan agreement was deemed to be an embeddedderivative instrument requiring separate accounting under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” and was initially valued at$62,000. The derivative asset is being amortized as interest expense over aterm beginning with the loan agreement effective date and ending with thecurrently expected payment date of the retroactive interest. The fair value ofthe derivative liability will be re-measured at each reporting period, with anychange in value charged or credited to interest expense. There was no change in the estimated fair value of thederivative liability for the three months ended March 31, 2007.

***AmountsDue Under Intellectual Property Agreements***

In connection with theCompany’s intellectual property agreements, as of March 31, 2007 the Companywas scheduled to make payments of $3.0 million in May 2007 to Schering and $5.0million in June 2007 to GE.  On April 27,2007, the Company amended the terms of the Schering agreement, modifying thepayment terms such that $1.5 million is due to be paid on or before fifteendays following execution of the amendment; $1.0 million on or before fifteendays after May 11, 2008; and $1.0 million on or before fifteen days after May11, 2009, for a total amount payable, including interest, of $3.5 million. Theeffect of the Amendment was to decrease current liabilities by $1.5 million,which was reclassified from current to long-term liabilities; there was noimpact on the results of operations.  Asof March 31, 2007, the Company has included $6.4 million in the current portionof long-term obligations, representing the present value plus accreted interestof the payments as of March 31, 2007, due under the GE and Schering agreements.

**8.  Deferred Revenue**

In July 2004, theCompany entered into a collaboration, license and supply agreement with Nycomedin which the Company granted Nycomed rights to develop and market Imagify inEurope.  As of March 31, 2007, Nycomedhas paid $12.0 million in license fees for the Company’s research anddevelopment efforts, which was being recognized ratably in revenue over thedevelopment period initially estimated at 42 months in July 2004. Estimation ofthis development period involves the evaluation of many assumptions anduncertainties inherent in the performance of a long term developmentproject.  The Company regularly evaluatesthese assumptions and uncertainties and the estimated development recognitionperiod may change if facts and circumstances change.  During 2006, theestimated development period was revised from 42 months to 54 months.  There was no change in the amortizationperiod during the three months ended March 31, 2007.  The remaining $4.7million of the $12.0 million in development payments already received, but yetto be recognized as revenue, is included in deferred revenue at March 31, 2007and will be recognized over the remaining estimated development period.

In October 2005 andFebruary 2006, the Company and Nycomed amended the collaboration agreementto accelerate $2.0 million in milestone payments in order to fund certainactivities associated with brand development and qualification of a commercialmanufacturing facility. The $2.0 million in payments received pursuant to theseamendments through December 31, 2006 are considered advances against a futuremilestone payment for a European regulatory filing, or Marketing AuthorizationApplication (“MAA”). This amount is classified as deferred revenue until theMAA milestone is achieved, provided that the applicable revenue recognitioncriteria are met.

**9.Income Taxes**

The Company has established a full valuation allowanceequal to the amount of its deferred tax asset as the realization of such assetis uncertain. In addition, the Company’s effective income tax rate is zero forall periods presented due to the full valuation allowance and lack of otherincome tax obligations.

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In July 2006, the Financial Accounting Standards Board(“FASB”) issued Interpretation No. (FIN) 48, “*Accountingfor Uncertainty in Income Taxes**– An Interpretation ofFASB Statement No. 109”.* FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with SFAS 109, “*Accounting forIncome Taxes*” and prescribes a recognition threshold and measurementattributes for financial statement disclosure of tax positions taken orexpected to be taken on a tax return. Under FIN 48, the impact of an uncertaintax position on the income tax return must be recognized at the largest amountthat is more-likely-than-not to be sustained upon examination by the relevanttaxing authority. An uncertain income tax position will not be recognized if ithas less than a 50% likelihood of being sustained.  Additionally, FIN 48 provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.

The Company is subject to taxation in the U.S. and theCommonwealth of Massachusetts.  Inconnection with the adoption of the provisions of FIN 48 on January 1, 2007 theCompany reviewed its tax positions. Based upon the reviews of the taxpositions, the Company did not identify any material unrecognized tax positionsupon the adoption of FIN 48 and therefore the Company’s adoption of FIN 48 hadno cumulative effect on its consolidated financial statements.  There have been no changes in unrecognizedtax benefits as a result of tax positions taken during the current period. TheCompany believes that its unrecognized tax benefits will not significantlychange within the twelve months of March 31, 2007.  The Company’s tax years since its inception in1991 are subject to examination by the tax authorities.  

The Company did not have any accrued interest orpenalties in its statement of financial position at the adoption of FIN48.  Should the Company incur interest orpenalties related to income taxes those amounts would be included in income taxexpense.  

**10.Stockholders’ Equity**

***Convertible Exchangeable Preferred Stock***

On February 24,2005, the Company issued 900,000 shares of 6.5% convertible exchangeablepreferred stock (the “Preferred Stock”) at $50.00 per share resulting inaggregate gross proceeds to the Company of $45.0 million (net proceeds ofapproximately $41.9 million after deducting underwriting discounts, commissionsand offering expenses). Each share of Preferred Stock has a liquidationpreference of $50.00 per share. Dividends on the Preferred Stock are cumulativefrom the date of original issue at the annual rate of $3.25 per share, payablequarterly on the first day of March, June, September, and December. Anydividends must be declared by the Company’s board of directors and must comefrom funds that are legally available for dividend payments. As of March 31, 2007, dividends accumulated on thePreferred Stock totaled $5.4 million, of which $5.2 million have been paid.

In April 2007, theCompany’s board of directors declared a quarterly dividend on the preferredstock for all holders as of May 15, 2007. This dividend, which totaled$0.6 million in the aggregate, will paid on June 1, 2007.

The Preferred Stock isconvertible into the Company’s common stock at any time at the option of theholder at a conversion rate of 7.2886 shares of common stock for each share ofPreferred Stock, based on an initial conversion price of $6.86 per share. Theinitial conversion price is subject to adjustment in certain events, but is notsubject to “price based” anti-dilution adjustment. The Company has reservedapproximately 5.3 million shares of common stock for issuance upon suchconversion.

The Company may elect toautomatically convert some or all of the Preferred Stock into shares of commonstock if the closing price of the Company’s common stock has exceeded $10.30per share (150% of the conversion price) for at least 20 trading days duringany 30-day trading period, ending within five trading days prior to notice ofautomatic conversion. Prior to March 1, 2009, if the Company elects toautomatically convert, or if any holder elects to voluntarily convert, thePreferred Stock, the Company will also make an additional payment (“Make-Whole”payment) equal to the aggregate amount of dividends that would have beenpayable on the Preferred Stock so converted from the original date of issuancethrough and including March 1, 2009, less any dividends already paid onthe Preferred Stock. This additional payment is payable by the Company, at itsoption, in cash, in additional shares of its common stock, or in a combinationof cash and shares of common stock. The Company has reserved a maximum ofapproximately 0.8 million shares of common stock for issuance under thisMake-Whole provision.

Through March 31,2007, 170,000 shares of Preferred Stock have been voluntarily converted into1,239,067 shares of the Company’s common stock. In connection with suchconversions, the Company issued an additional 304,052 shares of the Company’scommon

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stock in satisfaction ofthe required Make-Whole payment. The fair valueof these Make-Whole payments was approximately $1.5 million, which was chargedagainst the derivative liability.

In accordance with SFASNo. 133, the Company is required to separate and account for as anembedded derivative, the dividend make-whole payment feature of the PreferredStock offering. As an embedded derivative instrument, the dividend make-wholepayment feature must be measured at fair value and reflected as a liability.Changes in the fair value of the outstanding portion of the derivative arerecognized in earnings as unrealized gain or loss on derivative in thestatement of operations. The Company determined the fair value of the dividendmake-whole payment feature to be $3.1 million at February 24, 2005 (thecommitment date). This amount was allocated from the proceeds of the PreferredStock to the derivative liability. At March 31, 2007, the derivativeliability was valued at approximately $0.2 million.

In April 2007, one stockholdervoluntarily converted 40,000 shares of preferred stock into 291,545 shares ofthe Company’s common stock.  Inconnection with the conversion, the Company issued an additional 43,551 sharesof the Company’s common stock in satisfaction of the required Make-Wholepayment.

The Company may elect toredeem the Preferred Stock at declining redemption prices on or afterMarch 6, 2009.

The Preferred Stock isexchangeable, in whole but not in part, at the option of the Company on anydividend payment date for the Company’s 6.5% convertible subordinateddebentures (“Debentures”) at the rate of $50 principal amount of Debentures foreach share of Preferred Stock. The Debentures, if issued, will mature 25 yearsafter the Exchange Date and have terms substantially similar to those of thePreferred Stock.

The Preferred Stock hasno maturity date and no voting rights prior to conversion into common stock,except under limited circumstances.

***Common Stock***

As of March 31, 2007,there were 98.5 million shares of common stock authorized, 38.1 million sharesof common stock outstanding and 18.2 million shares of common stock reservedfor issuances, representing 5.3 million shares reserved for issuance for inconnection with outstanding convertible exchangeable preferred stock, 0.8million shares reserved for issuance in connection with the make-whole paymentsprovisions of the outstanding convertible exchangeable preferred stock, 6.7million shares reserved for issuance in connection with outstanding commonstock warrants, 4.8 million shares reserve for issuance in connection withoutstanding stock options, 0.4 million shares reserved for issuance, inaggregate, in connection with shares available for future stock or optiongrants under the 2003 Stock Option Plan and 2005 Stock Option Plan and 0.2million shares reserved for issuance under the Employee Stock Purchase Plan.

***Equity Line of Credit Arrangement***

OnAugust 31, 2006, the Company entered into what is sometimes termed anequity line of credit arrangement with Azimuth Opportunity Ltd. The arrangementprovides that, upon the terms and subject to the conditions set forth therein,Azimuth is committed to purchase up to $30,000,000 of the Company’s commonstock, or up to a maximum of approximately 7.6 million shares of common stock,whichever occurs first, over the 18-month term of the agreement.  No shares of common stock were issued nor wasany commitment fee paid to Azimuth in connection with the execution anddelivery of the agreement. The Company is not required to sell any shares ofcommon stock under the agreement.

Fromtime to time during the term of the agreement, and at the Company’s solediscretion, the Company may present Azimuth with draw down notices requiringAzimuth to purchase the Company’s common stock at a per share purchase priceequal to the daily volume weighted average price of the common stock, less adiscount ranging from 3.875% to 5.875%. Through March 31, 2007 the Company has not issued any shares under thisagreement.

**11. Common Stock Warrants**

As of March 31, 2007,warrants to purchase shares of the Company’s common stock, the origination ofwhich were derived in connection with debt and lease financing transactions,the collaborative agreement with Nycomed and the April 2006 and December 2006common stock offerings, were outstanding for an aggregate of 6,747,085 sharesof common stock at an effective weighted average price of $5.64 per shares asfollows:

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| Number of | ** ** | **Exercise Price** | ** ** | **Expiration**           | ** **         |
|----------------|------------|-------------------------|------------|--------------------------|--------------------|
| **Shares**     | ** ** | **Per Share**      | ** ** | **Date**                 | ** **         |
| 7,517          |       | $                       | 12.84      |                     | June 6,  2007 |   |
| 5,194          |       | 28.50                   |       | February 21,  2008  |               |
| 3,404          |       | 18.00                   |       | February 28,  2008  |               |
| 450,897        |       | 8.46                    |       | April 11,  2008     |               |
| 684            |       | 14.00                   |       | April 11,  2008     |               |
| 7,540          |       | 8.46                    |       | June 27,  2008      |               |
| 573,105        |       | 8.50                    |       | August 2,  2008     |               |
| 16,212         |       | 19.80                   |       | October 16,  2008   |               |
| 14,934         |       | 19.80                   |       | October 19,  2008   |               |
| 114,895        |       | 8.50                    |       | October 20,  2008   |               |
| 55,732         |       | 6.28                    |       | November 30,  2009  |               |
| 2,688          |       | 19.80                   |       | January 5,  2010    |               |
| 30,844         |       | 28.50                   |       | March 30,  2011     |               |
| 28,138         |       | 28.50                   |       | September 27,  2011 |               |
| 1,731,600      |       | 7.97                    |       | April  12, 2011          |               |
| 3,703,701      |       | 3.11                    |       | December  12, 2011       |               |
| 6,747,085      |       | $                       | 5.64       |                     |               |   |

 

**12. New Accounting Pronouncements**

In September 2006, the FASB issued SFAS (FAS) No. 157, “*Fair Value Measurements*,” which iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. The purposeof FAS 157 is to clarify and set forth consistent rules for defining fairvalue, establishing a framework for measuring fair value in generally acceptedaccounting principles and expanding disclosures about fair value measurements.FAS 157 applies under other accounting pronouncements that require or permitfair value measurements where those accounting pronouncements have determinedthat fair value is the relevant measurement attribute. FAS 157 does not requireany new fair value measurements, but for some entities the application of FAS157 could change current practice.  TheCompany is currently assessing what impact, if any, the adoption of thisstatement will have on its consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities,”* which is effective as of the beginning of an entity’sfirst fiscal year beginning after November 15, 2007.  This statement allows the measurement at fairvalue of financial instruments and certain other items that are currently notrequired to be measured at fair value. The objective of FAS 159 is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. The fair value option established by this Statement permits themeasurement of eligible items at fair value at specified election dates, withunrealized gains and losses on the items for which the fair value option hasbeen elected reported in earnings at each subsequent reporting date. TheCompany is currently assessing what impact, if any, the adoption of thisstatement will have on its consolidated financial statements.

**13.****    Subsequent Events**

*MaterialAgreement*

In connection with theCompany’s Patent Transfer Agreement with Schering, the Company was scheduled tomake a payment of $3.0 million in May 2007. On April 27, 2007, the terms of this agreement were amended, modifyingthe payment terms to $1.5 million due in May 2007, $1.0 million due in May 2008and $1.0 million due in May 2009, for a total payable of $3.5 million.

*Preferred Stock Conversion*

In April 2007, onestockholder voluntarily converted 40,000 shares of preferred stock into 291,545shares of the Company’s common stock.  Inconnection with the conversion, the Company issued an additional 43,551 sharesof the Company’s common stock in satisfaction of the required Make-Wholepayment.

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* *

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

*Statementscontained herein, including without limitation, “Management’s Discussion andAnalysis of Financial Condition and Results of Operation,” contains certainprojections, estimates and other forward-looking statements. “Forward-lookingstatements,” as that term is defined in the Private Securities LitigationReform Act of 1995, are not historical facts and involve a number of risks anduncertainties. Words herein such as “may,” “will,” “should,” “could,” “would,” “expects,”“plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,”“potential,” and similar expressions (as well as other words or expressionsreferencing future events, conditions or circumstances) are intended toidentify forward-looking statements.*

*Forward-lookingstatements include, but are not limited to: our plans to develop and market newproducts and the timing of these development programs, in particular ourestimates of the timing of an NDA and MAA for Imagify; the timing andlikelihood of regulatory approval of an NDA and MAA for Imagify; the level ofclinical and commercial interest in Imagify; the required size and make-up of asales force to effectively launch Imagify; our development of other productcandidates; our ability to qualify a commercial manufacturing facility forImagify; our capital requirements and our needs for additional financing; thetiming and level of future expenses, revenues and profitability; our estimatesof the size of the potential markets for our product candidates; our selectionand licensing of product candidates; our ability to attract and retaincollaborators with acceptable development, regulatory and commercializationexpertise; the benefits to be derived from corporate collaborations, licenseagreements and other collaborative efforts, including those relating to thedevelopment and commercialization of our product candidates; sources ofrevenues and anticipated revenues, including contributions from corporatecollaborations, license agreements and other collaborative efforts for thedevelopment and commercialization of products; our ability to create aneffective direct sales and marketing infrastructure for products we elect tomarket and sell directly; the rate and degree of market acceptance of ourproduct candidates; the timing and amount of reimbursement for our productcandidates; the success and timing of other competing therapies that are or maybecome available; and the manufacturing capacity for our product candidates.*

*Ouractual results and the timing of certain events may differ materially from theresults discussed, projected, anticipated or indicated in any forward-lookingstatements. Any forward-looking statement should be considered in light offactors discussed in Part II. Item 1A “Risk Factors” and elsewhere in thisreport. We caution readers not to place undue reliance on any suchforward-looking statement, which speak only as of the date they are made. Wedisclaim any obligation, except as specifically required by law and therules of the Securities and Exchange Commission, to publicly update orrevise any such statements to reflect any change in company expectations or inevents, conditions or circumstances on which any such statements may be based,or that may affect the likelihood that actual results will differ from thoseset forth in the forward-looking statements.*

*Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and related notes thereto included elsewhere in thisForm 10-Q.*

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**Overview**

We are a specialty pharmaceutical company that develops new drugs andimproved formulations of existing drugs using our proprietary porousmicroparticle technology. We are focused on developing proprietary drugs thatcan offer significant benefits such as improved safety and efficacy, increasedpatient compliance, greater ease of use, expanded indications or reduced cost.Our lead product candidate, ImagifyTM(perflubutane polymer microspheres), is a cardiovascular drug in Phase 3clinical development for the detection of coronary artery disease, the leadingcause of death in the United States. In May 2007, we announced the results ofour second Phase 3 pivotal trial for Imagify. We believe that our Imagifyclinical results support an NDA submission and we are working to submit an NDAfor Imagify the estimated timing of which is Q4 2007.  We currently plan, subject to regulatoryapprovals, to directly market Imagify in the United States.  In Europe, we have partnered with Nycomed forthe marketing and sale of Imagify. In addition to our progress with Imagify, we have demonstrated that our technology canimprove the formulation of hydrophobic drugs and inhaled asthma drugs.

 

We believe thatImagify-enhanced cardiac stress ultrasound has the potential to significantlyreduce the time, cost and resources needed in the assessment of myocardialperfusion, compared to nuclear stress testing, without subjecting patients toradiation. Myocardial perfusion is blood flow to the heart muscle, a sensitivemarker for coronary artery disease.  There is no ultrasound contrast agentcurrently approved by FDA for use in cardiac ultrasound for myocardialperfusion imaging or for any other indication in conjunction with cardiacstress ultrasound.

We developed Imagify andour other product candidates using our proprietary technology which enables usto control the size and porosity of particles, including nanoparticles andmicroparticles, in a versatile manner, so we can customize the particles toaddress the delivery needs of a variety of drugs. We are focused on creatingporous microparticles that are smaller than red blood cells. Some of thesemicroparticles are nanoparticles which are smaller than 1 micron. Smallmicroparticles are important for delivering drugs intravenously so that theycan pass through the body’s smallest blood vessels, for increasing the surfacearea of a drug so that the drug will dissolve more rapidly, and for deliveringdrugs to the lung via inhalation. Porosity is important for entrapping gases inmicroparticles, for controlling the release rate of the drug from amicroparticle, and for targeting inhaled drugs to specific regions of the lung.

We have incurredsignificant operating losses to develop our product candidates and weanticipate continuing to incur significant operating losses in the comingyears. In particular, we expect to incur significant additional expenses andexperience other significant capital requirements to seek regulatory approvalfor Imagify, to complete the qualification of a manufacturing facility for theinitial commercial manufacture of Imagify and, subject to regulatory approvals,to launch Imagify. Since our inception, we have funded our operations primarilythrough private and public placements of equity securities, equipment-backedfinancings and other debt financings.

**Imagify Phase 3 Clinical Trials**

We have completed twoPhase 3 pivotal clinical trials for Imagify and we believe that these clinicaltrial results support our plan to submit an NDA seeking approval to market andsell Imagify.  These two pivotal trials,named RAMP-1 and RAMP-2, respectively, were independent multi-center pivotaltrials conducted at clinical sites primarily located in North America andEurope. “RAMP” stands for Real-time Assessment of Myocardial Perfusionwith echocardiography. Data from the Phase 3 pivotal studies are intended forsubmission to U.S., European, and potentially other regulatory authorities.

*Pivotal Trial Design.*RAMP-1 and RAMP-2 were designed to demonstrate that Imagify-enhanced cardiacstress ultrasound is non-inferior to nuclear stress testing. Non-inferiorrefers to a statistical type of trial analysis which is designed to show that onetest is comparable to another test within a certain statistical margin oferror. We believe that if the trial data demonstrates to regulatory authoritiesthat Imagify-enhanced cardiac stress ultrasound is non-inferior to nuclearstress testing and if Imagify receives regulatory approval, thatImagify-enhanced cardiac stress ultrasound will compete with nuclear stresstests based on criteria such as lower costs, faster study time, quickeravailability of results and no exposure to radiation.

Patients enrolled in theRAMP-1 and RAMP-2 trials acted as their own controls. Patients enrolled inthese studies received an Imagify-enhanced cardiac stress ultrasound. All ofthe patients evaluated for efficacy in these trials also received a nuclearstress test. The Imagify-enhanced cardiac stress ultrasound images and thenuclear stress images resulting from these studies were forwarded by theclinical sites to an independent clinical research organization where allinformation about the patients, other than what is shown by the imagesthemselves, was removed. Because all such patient information was removed fromthe images, evaluators of the images are referred to as “blinded readers”. Inthe trials, images produced by Imagify-enhanced stress echo were evaluated byechocardiologists, who we refer to as ultrasound blinded readers. Imagesproduced by nuclear stress tests were evaluated by nuclear cardiologists, whowe refer to as nuclear blinded readers. In these trials, we used expert and highly experienced nuclear readers.In addition, to ensure high quality standards for the comparator and truthstandards in the trials, we standardized the protocol for the conduct of thenuclear

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stress tests and coronaryangiography based on our understanding of on best clinical practice and used aleading nuclear imaging contrast agent for enhancement of the nuclear stressimages.

In the trials, a truthstandard defined which patients have disease and which patients are normal, andserved as the basis for quantifying the performance of the ultrasound blindedreaders and the performance of the nuclear blinded readers.  Non-inferiority or, superiority whenachieved, was determined by comparing the performance of the ultrasound blindedreader to the nuclear blinded reader.

Non-inferiority ofImagify-enhanced cardiac stress ultrasound relative to nuclear stress wasevaluated in three ways. First,non-inferiority was evaluated in all patients. “Accuracy” is defined asa measure of the percentage of patients in which the test is correctrelative to the truth standard.Accuracy was established in our RAMP-2 statistical analysis plan as theprincipal primary endpoint of the pivotal trials and the gating endpoint withrespect to our NDA submission. In accordance with the trial design, if theaccuracy endpoint was not achieved in the trial, the trial would fail. Providedthat ultrasound blinded readers demonstrated that their accuracy wasnon-inferior to the results from the nuclear blinded readers, non-inferioritywas evaluated in two subsets of patients, those with disease and those withoutdisease.  “Sensitivity” is defined as ameasure of the effectiveness of the test in assessing the presence of diseasein the patients who have been shown by the truth standard as having coronaryartery disease and “specificity”as a measure of the effectiveness of the test in assessing the absenceof disease in the patients who have been shown by the truth standard to be freeof coronary artery disease. Sensitivity and specificity were the second andthird clinical trial endpoints; the component primary endpoints. For bothultrasound and nuclear, because sensitivity and specificity are subsets ofaccuracy, when sensitivity increases and overall accuracy remains unchangedthere is a corresponding decrease in specificity. Imaging techniques such asnuclear and ultrasound, which provide clinicians with information for theirevaluation, involve reader judgment and have historically demonstratedvariability between readers with respect to sensitivity and specificitydepending upon whether the readers are aggressive (meaning a tendency todiagnose disease) or conservative (meaning a tendency to diagnose an absence ofdisease) in evaluating difficult cases. The principal primary endpoint ofaccuracy is a measure that incorporates both sensitivity and specificity acrossall patients in the clinical trials. Accuracy tends to be more objective as itis less susceptible to conservative and aggressive reader judgment.

Patients enrolled in theRAMP-1 and RAMP-2 clinical trials all were patients suspected of having, orknown to have, coronary artery disease. For inclusion in the RAMP-1 trial, allpatients were previously referred, in accordance with the current practice ofmedicine, for a nuclear stress test.  Forinclusion in the RAMP-2 trial, all patients were previously referred, inaccordance with the current practice of medicine, for a coronaryangiography.  Accordingly and intentionally,overall patients enrolled in RAMP-2 had a higher risk of coronary arterydisease than patients enrolled in RAMP-1.

*Pivotal Trial Results Overview.*Therewere three different readers in each of RAMP-1 and RAMP-2 (6 readers in total).They all demonstrated that they were non-inferior to nuclear stress withrespect to the principal primary endpoint of accuracy.  In the RAMP-1 trial, the trial with therelatively lower risk patient population, the ultrasound blinded readersdemonstrated superior specificity (themeasure of effectiveness in assessing the absence of disease) comparedto nuclear stress. In the RAMP-2 trial, the trial with the relatively higherrisk patient population, the ultrasound blinded readers demonstrated superiorsensitivity (the measure ofeffectiveness in assessing disease) compared to nuclear stress. We demonstratedsuperior specificity in RAMP-1 and superior sensitivity in RAMP-2.  Only one of the three ultrasound blindedreaders demonstrated non-inferiority to nuclear stress for sensitivity inRAMP-1, and only one of the three ultrasound blinded readers demonstratednon-inferiority to nuclear stress for specificity in RAMP-2.  We believe that the missed component primaryendpoints in these trials was due largely to the inherent trade-off betweensensitivity and specificity caused by “aggressive” and “conservative”ultrasound and nuclear readers. While these component primary endpoints weremissed, we believe that both trials demonstrated that, overall,  Imagify-enhanced cardiac stress ultrasound isjust as accurate as nuclear stress across all readers. We also believe thatbecause, in addition to achieving the principal primary endpoint in bothtrials, Imagify-enhanced cardiac stress ultrasound also demonstrated superiorresults on component primary endpoints which we believe were the most importantin each of these trials (specificity in the lower risk patient population andsensitivity in the higher risk patient population), this data supports an NDAsubmission for Imagify. We intend to submit our NDA in Q4 2007 subject tocompletion of required remaining qualification steps relating to its commercialmanufacturing facility.

*RAMP-1 Trial Results.*  In June 2006, we announced results of RAMP-1.320 patients were enrolled in the RAMP-1 clinical trial. More than 99% of theultrasound images acquired from patients enrolled in the trial wereevaluable.  The truth standard in thistrial was angiography, clinical outcome or clinical outcome with the unblindedevaluation of the nuclear stress test. The truth standard was angiography in42% of patients.

The accuracy andspecificity results for RAMP-1 exceeded the criteria for success, which wasdefined in our statistical analysis plan as the ability of 2 out of 3ultrasound blinded readers to show non-inferiority compared to nuclearstress.  Three of three ultrasound

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blinded readers hadstatistically non-inferior accuracy to the nuclear blinded reader, whoseaccuracy was 70% (all p values <0.005).  Two of three ultrasound blinded readers had statistically superiorspecificity to the nuclear blinded reader, whose specificity was 63% (p valuefor both with respect to non-inferiority <0.001). The sensitivity resultsmissed the criteria for success of the trial with one of three ultrasoundblinded readers having statistical non-inferior sensitivity (p=0.002) to thenuclear blinded reader’s sensitivity of 78%. Based upon our review of thesafety data from this trial, we believe Imagify was well tolerated. Diseaseprevalence in the RAMP-1 trial was 44%.

The majority of adverseevents, or AEs, reported were mild in intensity, transient, and resolvedwithout residual effects. The most common AEs reported were headache, chestpain, nausea, flushing and dizziness and the majority of these AEs occurredfollowing the administration of the dipyridamole pharmacologic stress agent.Serious adverse events, or SAEs, and dose discontinuation was experienced infour and five of 320 patients, respectively. All SAEs were non-lifethreatening, transient, and resolved without residual effects.

*RAMP-2 Trial Results.*  In May 2007, we announced results of RAMP-2.457 patients were enrolled in the RAMP-2 trial. In accordance with the trialdesign, patients who did not have anuclear stress test or whose nuclear stress test was not in accordance with thetrial protocol were evaluated for safety but excluded from the primary efficacyanalysis. The reported efficacy results from the RAMP-2 trial are based on 377patients. 100% of the ultrasound images were evaluable. Coronary angiographywas used in 98% of the patients studied as the truth standard.  A truth standard defines which patients havedisease and which patients are normal, and serves as the basis for quantifyingthe performance of the ultrasound blinded readers and the performance of thenuclear blinded readers.

The accuracy andsensitivity results for RAMP-2 exceeded the criteria for success, which wasdefined in our statistical analysis plan as the ability of 2 out of 3ultrasound blinded readers to show non-inferiority compared to nuclearstress.  Three of the ultrasound blindedreaders had superior sensitivity and non-inferior accuracy to nuclear stress.The median Imagify-enhanced cardiac ultrasound blinded results and mediannuclear stress reader were, respectively, 70% and 67% for accuracy (all pvalues <0.001) and 73% and 61% for sensitivity(all p values <0.020).  The specificity results missed the criteriafor success with one of three ultrasound blinded readers having statisticalnon-inferior specificity to nuclear stress (p = 0.01). The medianImagify-enhanced cardiac ultrasound blinded results and median nuclear stressresults for specificity were, respectively, 66% and 76%. ** **Based upon our review of the safetydata from this trial, we believe Imagify was well tolerated. Disease prevalencein the RAMP-2 trial was 58%.

Themajority of AE’S reported were mild in intensity, transient, and resolvedwithout residual effects.  The most common AEs reported were headache,increased white blood cell count, flushing, nausea, and chest pain. Eachpatient in the trial was subjected to pharmacological stress to assessmyocardial perfusion. The majority of these adverse events occurred followingthe administration of the dipyridamole pharmacologic stress agent. SAEs werereported in six patients. All SAEs were non-life threatening. Seven of the 457patients enrolled discontinued dosing in the clinical trial due to AEs or SAEs.Imagify has now been cumulatively studied in over 1,000 patients with known orsuspected of having coronary artery disease. Based upon the results of thesestudies, the Company believes that Imagify is well tolerated.

Webelieve that experience from RAMP-1 contributed to the higher ultrasoundsensitivity results in RAMP-2.  FollowingRAMP-1, the ultrasound blinded readers from RAMP-2 were trained based on thesefindings.  During this training period,the RAMP-2 readers remained blinded to the RAMP-2 results.

The discussion of our NDAsubmission timing and likelihood of success reflects our current assumptions, basedon our knowledge and experience and the guidance of our advisors.  Wecannot assure you that these timelines will be met, nor can we assure you thatour estimates and assumptions will not change based upon ongoing regulatoryfeedback or that FDA will accept and approve our NDA once submitted.  We cannot control nor predict the timing orextent, if any, of FDA approval of Imagify. Nycomed is responsible forsubmission of Imagify for approval in Europe. We cannot control nor predict thetiming or extent, if any, of Imagify approval in Europe or elsewhere.

**Imagify Manufacturing Facility Update**

Prior to filing an NDAfor Imagify, we must demonstrate that we can successfully and repeatedlymanufacture Imagify in compliance with current good manufacturing practices, orcGMPs, enforced by FDA and overseas regulatory agencies in the manufacturingfacility that we intend to use to produce Imagify at commercial launch.  We must successfully demonstrate themanufacture of Imagify in accordance with European regulatory requirementsprior to Nycomed filing an MAA for Imagify.

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In late 2005, wesubstantially completed the build-out of a 58,000 square foot commercialmanufacturing facility.  In 2006, at thisfacility in Tewksbury Massachusetts, we completed commissioning of themanufacturing equipment and utilities, produced full commercial scaledevelopment batches of Imagify and substantially completed all InstallationQualification, or IQ, and Operational Qualification, or OQ, requirementsrelating to the equipment and utilities initially needed for thisfacility.  Remaining steps in 2007 toqualification of the manufacturing facility include; aseptic validation,process qualification and continued product stability testing. All suchqualification activities need to be completed under cGMPs. Data from theproduction of Imagify under cGMPs is intended to be part of our NDA submissionof Imagify.  Based upon our currentplans, we expect to complete this qualification phase in time to support a NDAsubmission in the fourth quarter of 2007.

We believe that our existing facilities, assuming theaddition of a second lyophilizer that the facility is designed to support, areadequate to meet our current and initial expected commercial requirements andthat suitable space will be available as needed.

Although thequalification of the commercial manufacturing facility has completed IQ’s andOQ’s, we cannot assure you that we will not encounter complications in thequalification of operations in this facility which complications could addadditional costs or delay our filing of a NDA for Imagify.

**OperationalActivities**

Our current operational activitiesinclude:

*NDA/MAA*:  We currently expect to submit an NDA insupport of Imagify in Q4 2007.  Steps weplan to take for submission of the NDA include further analyzing andsummarizing the clinical trial results, qualifying our commercial manufacturingfacility and meeting with FDA to confirm our belief that no additional clinicaltrials are necessary.  However, we willcontinue to analyze our clinical trial results and may ask cardiologists toreview RAMP-1 and/or RAMP-2 images to further understand the value of theseimages and related data.  We intend tosubmit the NDA in electronic eCTD format so that it can be also be utilized forsubmission in Europe.

*Preparations forCommercialization of Imagify*: We plan to continue conductingmarket research and advancing our plans and preparation for the commerciallaunch of Imagify.  Our current plan isfor us to directly market Imagify in the United States, however, we willcontinue to evaluate partnering opportunities and their potential advantagesand disadvantages to us. We also plan to conduct various clinical trialsdesigned to support the commercialization of Imagify.  In Q1 2007, we completed the ACCESS(Acquiring Consensus for Contrast Echocardiography System Settings) clinicaltrial. The ACCESS trial enrolled 39 patients. In this trial we believe we havedemonstrated the compatibility of Imagify with multiple different ultrasoundimaging systems.  This trial is designedto provide a qualitative understanding of Imagify use in association with commonlyused ultrasound equipment. We plan to evaluate the prognostic value of Imagify,which is the ability to predict, using Imagify, if the patient is likely tohave a future cardiac event, through a trial called PACE (Prognostic Assessmentof Contrast Echocardiography). We have begun preparing for the PACE clinicaltrial, no new administration of Imagify will be required for PACE, as we willconduct follow-up analysis on patients from the RAMP-1 and RAMP-2 trials. Weanticipate results from this trial in the first half of 2008.

*Publication of Imagify Results*:We plan to work with the clinical investigators from RAMP-1 and RAMP-2 to havethese trial results published and presented.

*Other Product Development*:We are increasing our emphasis on pipeline development and anticipateannouncing a new program in Q3 2007.

Although we are workingtowards the achievement of these operational objectives, there can be noassurance that we will successfully achieve these objectives in a timely orsuccessful manner, or that they will be achieved at all.

**FinancialOperations Overview**

*Revenue.*    Wehave not generated any revenue from product sales since our inception. SinceJuly 2004, when we entered into our collaboration agreement with Nycomed, themajority of our revenue has been collaboration revenue recognized in connectionwith research and development activities performed under this agreement.  As of March 31, 2007 Nycomed has paid us$12.0 million in license fees for our research and development efforts. We arerecognizing this $12.0 million of initial license and research and developmentpayments ratably over a period currently estimated at 54 months.  The length of this research and developmentperiod, which is the period over which we are obligated to perform services, isestimated based on available facts and circumstances.  We periodically evaluate the assumptionsunderlying our estimate and change our estimate when appropriate.

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Further in the future, wewill seek to generate revenue from a combination of product sales, up-front ormilestone payments and manufacturing payments in connection with collaborativeor strategic relationships, and royalties resulting from the license of ourproducts and intellectual property.

*Researchand Development Expense.  * Research and developmentexpense consists of expenses incurred in developing, manufacturing and testingproduct candidates. These expenses consist primarily of salaries and relatedexpenses for personnel, fees paid to professional service providers inconjunction with independently monitoring our clinical trials and acquiring andevaluating data in conjunction with our clinical trials, costs of materialsused in clinical trials and research and development, depreciation of capitalresources used to develop our products, costs of facilities, the legal costs ofpursuing patent protection on select elements of our intellectual property,costs for intellectual property rights we have acquired or licensed andstock-based compensation. We expense research and development costs, includingpatent related costs, as incurred. We believe that significant investment inproduct development is a competitive necessity and plan to continue these investmentsin order to realize the potential of our product candidates and proprietarytechnologies. Development programs for later stage product candidates, such asImagify, tend to cost more than earlier stage programs due to the length andthe number of patients enrolled in clinical trials for later stage programs anddue to costs of scaling production to commercial scale.

*Generaland Administrative Expense.  * General andadministrative expense consists primarily of salaries and other related costsfor personnel in executive, finance, accounting, information technology,business development and human resource functions. Other costs include facilitycosts not otherwise included in research and development expense, professionalfees for legal and accounting services and stock-based compensation.  In addition, we categorize our marketresearch and other marketing-type costs as general and administrative expensebecause we have not yet obtained approval to market or sell our productcandidates.

*InterestIncome.*    Interest income consists ofinterest earned on our cash and cash equivalents.

*InterestExpense.*    Interest expense consistsprimarily of interest incurred on equipment leases, equipment loans and otherfinancing arrangements.

*Changein Valuation of Derivative.  * The terms of ourFebruary 2005 convertible preferred stock offering and our March 2005Mass Development loan agreement contain features considered to be embeddedderivatives which are recorded at estimated fair value in accordance withStatement of Financial Accounting Standards No. 133, *Accountingfor Derivative Instruments* (SFAS 133). Change in valuation of derivative consists of other income(expense) recognized on the change in fair value of the derivative at the endof each reporting period.  The change inthe value of the embedded derivative related to the preferred stock is affectedby a number of assumptions including the number of preferred sharesoutstanding, the amount of dividends paid and the probability and timing ofconversion into common stock. The derivative liability is reduced for anymake-whole payments made during the period upon conversions of preferred stockto common stock. The change in the value of the derivative related to the loanis affected by the expected timing of future positive net cash flows fromoperations.

*Dividendson Preferred Stock.  * For the three months endedMarch 31, 2007 and 2006, dividends on preferred stock consisted ofdividends paid or accumulated on the convertible exchangeable preferred stockwhich we issued in February 2005. Dividends on preferred stock exclude anymake-whole payments on conversion of preferred stock to common stock. Dividendson our preferred stock are cumulative from the date of original issue at theannual rate of $3.25 per share, payable quarterly on the first day of March,June, September, and December. Any dividend payment must be declared by ourboard of directors and must come from funds that are legally available fordividend payments.

**Resultsof Operations**

*ThreeMonths Ended March 31, 2007 and 2006*

*Revenue.*   In connection with our collaboration agreement with Nycomed entered into inJuly 2004, Nycomed has paid us $12.0 million in license fees for ourresearch and development efforts. We had previously been recognizing this $12.0million in research and development payments ratably over the estimateddevelopment period, as defined, of 42 months. Estimation of this development period involves the evaluation of manyassumptions and uncertainties inherent in the performance of a long termdevelopment project.  We regularlyevaluate these assumptions and uncertainties and our estimated developmentrecognition period may change if facts and circumstances change.  Wereevaluated the assumptions underlying the development term and during 2006 andmodified our estimate of the development period over which we are obligated toperform services to 54 months. Collaboration revenue recognized under

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this agreement was$0.7 million for the three months ended March 31, 2007 versus $0.9million in 2006. The decrease in revenue of $0.2 million, or 22%, was due tothe modification of the estimated development period made during 2006.

*Researchand Development Expense*.    Researchand development expense for the three months ended March 31, 2007 decreased$0.9 million, or 8%, to $10.0 million versus $10.9 million in the prior yearperiod.  The decrease was primarily due to completion of RAMP-2 patientenrolment in Q2 2006 and the timing of material purchases in connection withthe validation of our commercial manufacturing facility for Imagify, partiallyoffset by a $0.4 million increase in expense for our earlier-stage developmentprograms.

Thefollowing table summarizes the primary components of our research anddevelopment expense for the three months ended March 31, 2007 and 2006:
|                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(In thousands)**                              | ** ** |
| Imagify                                 |       | $                                                    | 4,001      |   | $ | 5,010 |   |
| HDDS and PDDS                           |       | 656                                                  |       | 264 |   |
| Other direct  costs                     |       | 1,691                                                |       | 1,803 |   |
| Total direct  costs                     |       | $                                                    | 6,348      |   | $ | 7,077 |   |
| Indirect costs:                         |       |                                                 |       |   |   |
| Facility rent  costs                    |       | 863                                                  |       | 878 |   |
| Depreciation                            |       | 2,470                                                |       | 2,541 |   |
| Other indirect  costs                   |       | 307                                                  |       | 377 |   |
| Total indirect  costs                   |       | 3,640                                                |       | 3,796 |   |
| Total research and  development expense |       | $                                                    | 9,988      |   | $ | 10,873 |   |

 

We expect overallresearch and development expenses in 2007 to be lower than 2006, primarilybecause we do not anticipate entering into any new agreements to license oracquire additional intellectual property rights relating to Imagify.

*Late Stage Clinical DevelopmentProgram**(Imagify).* Our lead product candidate, Imagify, is a cardiovascular drug designedfor the detection of coronary artery disease. Direct expense for research anddevelopment of Imagify was $4.0 million for the three months ended March 31,2007 versus $5.0 million in 2006.  Theprimary contributor to the overall decrease in direct Imagify research anddevelopment costs in 2007 versus 2006 was lower material costs due to a largematerial purchase from one vendor in January 2006. Included in Imagify directcosts for the three months ended March 31, 2007 and 2006 were $2.1 million and$2.7 million, respectively, of costs relating to manufacturing-relatedactivities and manufacturing facility qualification. We anticipate that ourclinical costs relating to Imagify pivotal trials will decrease following therelease of RAMP-2 results in May 2007 and that these savings will be largely orfully offset by increased costs for regulatory affairs, medical affairs andmanufacturing.

*Early Stage Development Programs**(HDDS and PDDS).* During 2007, we anticipate the costs of early stage development programsto increase as we increase our focus on development of new productcandidates.  However, because these programsare in relatively early stages of development, we anticipate that costs relatedto Imagify will continue to represent our primary research and developmentexpenditures through 2007.

*OtherCosts.* Other direct research and development costs primarily consist ofmanagement and preclinical evaluation of other product candidates.

Each of our research anddevelopment programs is subject to risks and uncertainties, including therequirement to seek regulatory approvals, which are outside of our control. Forexample, our clinical trials may be subject to delays or rejections based onour inability to enroll patients at the rate that we expect or our inability toproduce clinical trial material in sufficient quantities and of sufficientquality to meet the schedule for our planned clinical trials. Moreover, theproduct candidates identified in these research and development programs,particularly our early stage programs, must overcome significant technological,manufacturing and marketing challenges before they can be successfullycommercialized. As a result of these risks and uncertainties, we are unable topredict with any certainty the period in which material net cash inflows fromsuch projects could be expected to commence or the completion date of theseprograms. Failure to commercialize these product candidates on a timely basiscould have a material adverse affect on our business, financial condition andresults of operations. We may seek to establish collaborative relationships tohelp us commercialize these product candidates, but there can be no assurancethat we will be successful in doing so.

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*Generaland Administrative Expense.*    Generaland administrative expense for the three months ended March 31, 2007 increased$0.6 million, or 23%, to $3.2 million versus $2.6 million in the prior yearperiod.  The increase was primarily due to higher personnel costs due toincreased staffing levels ($0.4 million), primarily marketing, with the balancefrom higher legal and accounting professional fees.

The following tablesummarizes the primary components of our general and administrative expense forthe three months ended March 31, 2007 and 2006: 
|                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(In thousands)**                              | ** ** |
| Direct costs                              |       | $                                                    | 3,039      |   | $ | 2,367 |   |
| Indirect costs:                           |       |                                                 |       |   |   |
| Facility costs                            |       | 126                                                  |       | 140 |   |
| Depreciation                              |       | 55                                                   |       | 47 |   |
| Total indirect  costs                     |       | 181                                                  |       | 187 |   |
| Total general and  administrative expense |       | $                                                    | 3,220      |   | $ | 2,554 |   |

 

We anticipate general andadministrative expenses to increase, including increases in expenses formarketing, sales and business development activities as we prepare for thecommercialization of Imagify as well as continue to evaluate opportunities forthe application of our HDDS and PDDS technology and to support other productdevelopment efforts.

*InterestIncome.*    Interest income for the threemonths ended March 31, 2007 increased $0.2 million, or 40%, to $0.7 millionversus $0.5 million in the prior year period.  The increase was primarilydue to higher average cash balances during the period.

*InterestExpense.*    Interest expense for thethree months ended March 31, 2007 and 2006 was $0.5 million.

*Changein Valuation of Derivative.* The derivative is related to the embedded derivative instrument from thedividend make-whole payment feature of the preferred stock offering that closedin February 2005. There was expense of $0.2 million from the change invaluation of derivative for the three months ended March 31, 2007 versus expenseof $0.9 million from the change in valuation of derivative for the three monthsended March 31, 2006.  The derivativeliability value is reduced as dividends payments on the preferred stock aremade, as well as for any conversions of preferred stock into common stock.

**Liquidityand Capital Resources**

Historically, we have financed our business throughthe issuance of equity securities, debt financings and equipment leases and,more recently, with funds from our collaboration with Nycomed. Our liquidityrequirements have arisen primarily from research and development expenditures, equipmentexpenditures and payments on outstanding indebtedness. As of March 31,2007, we had cash and cash equivalents of $47.4 million. As of March 31,2007 we owed approximately $0.1 million from capital leases and$21.8 million from notes payable and other long-term obligations. We alsohad operating lease commitments totaling $15.5 million for rent of ourfacilities.

During the three months ended March 31, 2007,operating activities used $11.1 million of cash. Net cash used by operatingactivities during this period resulted primarily from a net loss of$12.5 million and a decrease in accounts payable and accrued expenses of$1.3 million, partially offset by non-cash charges for depreciation andamortization of $2.5 million and non-cash charges for stock-basedcompensation of $0.7 million.   

During the three months ended March 31, 2007,investing activities used $0.1 million in cash. This use of cash was primarilyused for purchases of equipment incurred in connection with our commercialmanufacturing facility for Imagify. 

During the three months ended March 31, 2007,financing activities used $1.2 million in cash primarily due to paymentson long term obligations of $1.2 million, offset by proceeds from new long-termobligations of $0.6 million, and the payment of dividends on the redeemableconvertible preferred stock of $0.6 million.

Based upon our current plans, we estimate that ourquarterly cash spending from operating activities will be approximately $11 to$15 million for the balance of 2007. In addition, we anticipate quarterly payments of approximately $1.5million for repayment of debt related to prior equipment purchases andquarterly payments of approximately $0.6 million for dividends on outstandingpreferred stock. We anticipate that our capital expenses will aggregate toapproximately $4 to $7 million for the balance of 2007 and that these paymentswill not exceed $3 million in any single quarter. We also anticipate continuingto seek debt financing for such capital expenditures. These operating andcapital cost estimates include costs in preparation of commercialization ofImagify and costs to advance other potential product candidates. The estimatesinclude costs necessary to support qualification of our commercialmanufacturing facility as needed for an Imagify NDA submission.  In addition to the above estimated cashrequirements, as described below, we are scheduled to pay Schering $1.5 millionin May 2007 and GE Healthcare $5.0 million in June 2007.

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In April 2007, ourboard of directors declared a quarterly dividend on the preferred stock for allholders as of May 15, 2007. This dividend, which totals $0.6 million inthe aggregate, will be paid on June 1, 2007.

Effective April 27, 2007we amended our Patent Transfer Agreement with Bayer Schering Pharma AG dated asof May 11, 2005.  Prior to this amendment, we were due to make a paymentof $3.0 million to Schering on May 11, 2007.  The amendment provides that,in lieu of this payment, we will make a series of payment due as follows: $1.5million on or before fifteen days following execution of the amendment; $1.0million on or before fifteen days after May 11, 2008; and $1.0 million on orbefore fifteen days after May 11, 2009.

Effective March 28,2007 and January 5, 2007, we entered into a promissory note with GeneralElectric Capital Corporation, or GE Capital, in aggregate original principalamount each totaling $0.3 million for equipment already purchased by us. Thepromissory notes includes annual interest rates of 10.41% and 10.60%,respectively, and are payable over 42 consecutive months. The promissory noteis secured by the financed equipment pursuant to the terms of our MasterSecurity Agreement with GE Capital. The promissory note is subject toacceleration upon the happening of customary events of default, including thefailure to make timely payments of principal and interest.

Effective June 1,2006, we entered into an agreement to license on a non-exclusive basis variousultrasound-related intellectual property from GE Healthcare , or GE, a divisionof General Electric Company. In consideration of the non-exclusive license ofthese patents, we agreed to pay GE $10.0 million prior to commercial approvalof Imagify, of which $5.0 million was paid in June 2006 and $5.0 million is duein June 2007.  In addition, we agreed topay GE $5.0 million upon the commercial approval (defined as the first to occurof the approval of a New Drug Application in the United States or the approvalof a Marketing Authorization Application in Europe) of Imagify and $5.0 millionupon the one year anniversary of such commercial approval.  The latter two $5.0 million payments arecontingent upon achievement of future milestone events and, accordingly, havenot been recorded at this time.

Effective June 1,2006, we entered into an agreement to license on a non-exclusive basis variousultrasound-related intellectual property from Bracco International BV, orBracco. In consideration the non-exclusive license of these patents, we agreedto pay Bracco up to a total royalty ofEuros 3.0 million, of which Euros 0.5 million was paid in June 2006. Anadditional Euros 2.5 million is payable upon our achievement of certain definedregulatory milestones.  We also agreed topay a royalty on future Imagify revenue, up to a maximum royalty amount ofEuros 10.0 million, less a portion of the above-referenced milestone payments.Whereas the other obligations are contingent upon the outcome of future events,they have not been recorded at this time.

In June 2005, weentered into a equipment financing line with Oxford Finance Corporation, orOxford.  In 2005 and 2006, we borrowed anaggregate of $7.0 million against this line. As of March 31, 2007, net ofrepayments, we had $4.7 million outstanding under this line. Such borrowingsare collateralized by corresponding equipment and other capital purchases withrepayment due in monthly installments over 36 to 48 months, depending onthe nature of the equipment financed, with the last such repayment scheduledfor March 2010. Interest rates on these borrowings were fixed at the time ofeach borrowing and range from 10.3% to 10.9% Loan amounts are subject toacceleration upon the happening of certain customary events of defaultincluding failure to timely pay principal and interest.

In March 2005,we borrowed $2.0 million under a loan agreement with MassDevelopment tohelp finance certain tenant improvements to our commercial manufacturingfacility in Tewksbury, Massachusetts. Interest accrues under the loan at 5.0%per annum with retroactive adjustments to 9% upon our reaching certain definedearning levels. The repayment of principal and accrued interest coincides withthe original term of the Tewksbury lease, which was five-years, nine-monthswith options to extend the lease for up to two additional five-year terms. Nopayments were due under the loan for the first 24 months and we are scheduledto begin repayments on this loan in May 2007. Unpaid interest during thistwenty-four month period has been accrued and principal and interest will berepaid on a monthly basis thereafter such that the total amount outstandingshall fully amortize over the balance of the term in equal installments. Theloan is subject to acceleration upon certain customary events of default, includingfailure to timely pay principal and interest. The loan is secured by certain ofthe tenant improvements made at the Tewksbury facility.

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In February  2005,we issued 900,000 shares of 6.5% convertible exchangeable preferred stock, ourPreferred Stock, at $50.00 per share resulting in net proceeds of approximately$41.9 million after deducting underwriting discounts, commissions and offeringexpenses. Each share of Preferred Stock has a liquidation preference of $50.00per share. Dividends on the Preferred Stock are cumulative from the date oforiginal issue at the annual rate of $3.25 per share, payable quarterly on thefirst day of March, June, September, and December. Any dividends must bedeclared by our board of directors and must come from funds that are legallyavailable for dividend payments.  During 2006 and 2005, we paid $2.4 and$2.2 million, respectively, in dividends on our Preferred Stock. As ofMarch 31, 2007, 730,000 shares of Preferred Stock were outstanding. InFebruary 2007, our board of directors declared a quarterly dividend on thePreferred Stock for all holders as of February 15, 2007. This dividend,which totaled $0.6 million in aggregate, was paid on March 1, 2007.

We may elect toautomatically convert some or all of the Preferred Stock into shares of ourcommon stock if the closing price of our common stock has exceeded $10.30 pershare (150% of the conversion price) for at least 20 trading days during any30-day trading period, ending within five trading days prior to notice of automaticconversion. Prior to March 1, 2009, if we elect to automatically convert,or if any holder elects to voluntarily convert, the Preferred Stock, we willalso make an additional payment, the Make-Whole payment, equal to the aggregateamount of dividends that would have been payable on the Preferred Stock soconverted from the original date of issuance through and includingMarch 1, 2009, less any dividends already paid on the Preferred Stock.This additional payment is payable by us, at our option, in cash, in additionalshares of its common stock, or in a combination of cash and shares of commonstock.  We have reserved a maximum of approximately 900,000 shares ofcommon stock for issuance under this Make-Whole provision.

Through March 31, 2007,170,000 shares of Preferred Stock were voluntarily converted into 1,239,067shares, respectively, of our common stock. In addition, in connection withthese conversions we issued 304,052 shares of our common stock in satisfactionof the required Make-Whole payment.  InApril 2007, one stockholder voluntarily converted 40,000 shares of preferredstock into 291,545 shares of our common stock. In connection with the conversion, we issued an additional 43,551 sharesof our common stock in satisfaction of the required Make-Whole payment.

We may elect to redeemthe Preferred Stock at declining redemption prices on or after March 6,2009.  The Preferred Stock is exchangeable, in whole but not in part, atour option on any dividend payment date beginning on the exchange date(March 1, 2006) for our 6.5% convertible subordinated debentures, or theDebentures, at the rate of $50 principal amount of Debentures for each share ofPreferred Stock. The Debentures, if issued, will mature 25 years after theexchange date and have terms substantially similar to those of the PreferredStock.

In April 2004, weentered into an equipment financing line with General Electric CapitalCorporation. In 2004 and 2005, we borrowed an aggregate of $10.5 millionagainst this line. As of March 31, 2007, net of repayments, we had $6.9million outstanding under this line. In January 2006, the line was amended andthe availability was increased by an additional $3.5 million and was extendedthrough May 2007.  During 2007, weborrowed approximately $0.6 million and have approximately $1.4 millionremaining available under this line at March 31, 2007.  Such borrowings are collateralized bycorresponding equipment and other capital purchases with repayment due inmonthly installments over 36 to 48 months, depending on the nature of theequipment financed, with the last such repayment scheduled for October 2010.Interest rates on these borrowings were fixed at the time of each borrowing andrange from 8.7% to 10.7%. The loans under this line are subject to accelerationupon the happening of certain customary events of default, including failure totimely pay principal and interest.

In July 2004, weentered into a collaboration, license and supply agreement with Nycomed inwhich we granted Nycomed rights to develop and market Imagify in Europe. Underthe original terms of this agreement, Nycomed paid us license fees and researchand development payments totaling $12.0 million. The original agreement alsoprovides for Nycomed to pay to us up to $58.0 million in milestonepayments upon achievement of certain regulatory milestones and sales goals.Under the agreement, Nycomed has agreed to pay us to manufacture Imagify forthem and to pay us royalties on Nycomed’s sales of Imagify. InOctober 2005, our agreement with Nycomed was amended such that Nycomedpaid us an additional $0.2 million in 2005 for activities associated withcreating a brand name for Imagify and related trademark activities which amountdecreased by $0.2 million the potential $58.0 in milestone payments which maybe earned under the agreement. In February 2006, we and Nycomed agreed tofurther amend the agreement to accelerate $1.8 million in milestone payments inorder to fund certain activities associated with the qualification of our manufacturingfacility in Tewksbury, Massachusetts. We received this $1.8 million in 2006 asthe qualification costs were incurred. Payments received pursuant to theseamendments are considered advances against a future milestone payment for aEuropean regulatory filing, or MAA, and are deducted from that milestonepayment.

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In July 2004, weentered into a lease agreement for 58,000 square feet of commercialmanufacturing space in Tewksbury, Massachusetts. This lease has a five year,nine month term with options to extend the lease for up to two additionalfive-year terms at predetermined rental rates. Initially, we received ninemonths of occupancy free of base rent, followed by base rent of approximately$0.4 million in aggregate for the next twelve months with scheduled annualrental rate increases thereafter.

We believe, based on our operating plans, that unlesswe elect to reduce our current rate of spending and forego pursuit ofmilestones on our current schedule, we will within the next twelve months requiresignificant additional funds, which we may raise through public or privatesales of equity, or from borrowings, or from strategic partners. Our futurecapital requirements will depend on many factors, including the scope andprogress made in our research and development activities and the size andtiming of creating expanded manufacturing capabilities. We may also needadditional funds for possible future strategic acquisitions of businesses,patent licenses, products or technologies complementary to our business. We donot expect to generate significant revenues from Imagify, other than possiblelicense or milestone payments, unless or until we or current or potentialpartners submit application for and receive marketing approval from theapplicable regulatory authorities. Allowing our resources to become depletedmay make future funding more difficult or expensive. When additional funds arerequired or, in advance of such requirements, we anticipate that funds will beneeded, we may raise such funds from time to time through public or privatesales of equity or from borrowings or from strategic partners or we may delayfunding of certain development activities which could delay the filing of ourImagify NDA and the commercialization of Imagify which would have a materiallyadverse impact on our growth plans. We are evaluating our funding alternatives,additional equity financing may be dilutive to our stockholders; debtfinancing, if available, may involve significant cash payment obligations andcovenants that restrict our ability to operate as a business; and strategicpartnerships may result in royalties or other terms which reduce our economicpotential from products under development.

**ShelfRegistration Statement**

We have on file with theU.S. Securities and Exchange Commission , or SEC, a “universal shelf”registration statement on Form S-3 (Registration No. 333-134263) and a universal shelfregistration statement on Form S-3 (Registration No. 333-123854), whichprovide for the offer, from time to time, of common stock, preferred stock,debt securities and warrants up to an aggregate remaining availability ofapproximately $33.0 million and $27.3 million, respectively, net of financing amountspreviously executed under these registration statements and amounts reservedfor up to $30.0 million in potential financing under the equity line of creditarrangement we entered into in August 2006 with Azimuth Opportunity, Ltd.  The SEC declared the shelf registration statements effective onAugust 18, 2006 and April 15, 2005, respectively.  Subject to market conditions and our capitalneeds, and so long as we are then eligible to use the registration statementsunder SEC rules, we may again seek to use any remaining availability under theshelf registration statements by making an offering of securities covered forsale under the registration statements. In addition, we may amend our shelfregistration statements or file a new shelf registration statement toincrease our potential access to capital. If we elect to raise additionalcapital using a shelf registration statement, we may use the net proceeds fromthe sale of these securities for general corporate purposes, which may includefunding clinical trials, research and development, regulatory activities,acquisitions, including acquisitions of companies, products, intellectualproperty or other technology, repayment or refinancing of existingindebtedness, investments, capital expenditures, repurchase of our capitalstock and for any other purposes that we may specify in any prospectussupplement.

**Equity Line of Credit Arrangement**

In August 2006, weentered into what is sometimes termed an equity line of credit arrangement withAzimuth Opportunity Ltd. The arrangement provides that, upon the terms and subjectto the conditions set forth therein, Azimuth is committed to purchase up to$30.0 million of our common stock, or up to a maximum of approximately 7.6million shares of common stock, whichever occurs first, over the 18-month termof the agreement. From time to time during the term of the agreement, and atour sole discretion, we may present Azimuth with draw down notices requiringAzimuth to purchase our common stock at a per share purchase price equal to thedaily volume weighted average price of the common stock, less a discountranging from 3.875% to 5.875%, based on the volume weighted average price ofthe common stock.  As a result, ourexisting common stockholders will experience immediate dilution upon thepurchase of any shares of our common stock by Azimuth under thisagreement.  The sale of shares under thisequity line will be dilutive to existing stockholders and may have an adverseeffect on the price of our securities. The arrangement includes provisions under which we may, if elected, terminatethis equity line of credit without financial penalty.  We have not sold any stock under thisagreement through March 31, 2007.

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**Off-BalanceSheet Financing Arrangements**

We currently do not haveany special purpose entities or off-balance sheet financing arrangements otherthan operating leases.

**ContractualObligations**

The following tablesummarizes our contractual obligations as of March 31, 2007 and the effectsuch obligations are expected to have on our liquidity and cash flow in futureperiods:

|                                  | ** ** | **Payments due by period (in 000’s)** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------|------------|
| **Contractual obligations** | ** ** | **Total**                                                           | ** ** | **2007** | ** ** | **2008 -  2009** | ** ** | **2010  -  2011** | ** ** | **2012  and  beyond** | ** ** |
| Long-Term Debt                   |       | $                                                                   | 15,797     |   | $ | 4,996 |   | $ | 9,023 |   | $ | 809 |   | $ | 969 |   |
| Capital Lease  Obligations       |       | 98                                                                  |       | 24 |   | 65 |   | 9 |   | — |   |
| Operating Lease  Obligations     |       | 15,547                                                              |       | 2,197 |   | 6,265 |   | 5,653 |   | 1,432 |   |
| Purchase  Obligations            |       | 238                                                                 |       | 238 |   | — |   | — |   | — |   |
| Other Long-Term  Liabilities     |       | 8,500                                                               |       | 6,500 |   | 2,000 |   | — |   | — |   |
| **Total**                        |       | $                                                                   | 40,180     |   | $ | 13,955 |   | $ | 17,353 |   | $ | 6,471 |   | $ | 2,401 |   |

 

Long-TermDebt of $15.8 million includes $7.8 million in principal and interest payableto General Electric Capital Corporation and $5.4 million in principal and interest payable to Oxford FinanceCorporation under equipment loans with payments due in monthlyinstallments over 36 to 48 months, collateralized by the correspondingequipment.  The loans are subject to accelerationupon the occurrence of certain events of default, including failure to timelypay principal and interest.  Also included under Long-Term Debt is$2.6 million in principal and interest payments due under the MassDevelopmentloan, under which we borrowed $2.0 million to finance improvements to ourcommercial manufacturing facility in Tewksbury, Massachusetts. Interest accruesunder the loan at 5.0% per annum with retroactive adjustments to 9.0% in theevent we achieve positive operating cash flow as defined in the agreementwithout prior repayment of the loan. The repayment of principal and accruedinterest coincides with the term of the Tewksbury lease which has an initialfive-year, nine-month term. No payments were due under the loan for the first24 months, we are scheduled to begin loan repayments in May 2007. The loan issubject to acceleration upon certain events of default, including failure totimely pay principal and interest.

Capital Lease Obligations as classified pursuant toFASB Statement of Financial Accounting Standards No. 13, “*Accountingfor Leases*” relate to leases for business equipment.  We leased capital equipment through Banc ofAmerica Leasing Corporation. The remaining monthly payments range from $460 to$1,019 with maturities through June 2010.

Our operating leaseobligations of $15.5 million relate primarily to our headquarters andmanufacturing facility leases under which we pay monthly rent. Our Watertown,Massachusetts headquarters lease has an original term of 10 years, which beganin December 2001, and which was extended by six months during 2005. Thelease for our commercial manufacturing space in Tewksbury, Massachusetts has aninitial five year, nine month term, which began in July 2004, with options toextend the lease for up to two additional five-year terms at predeterminedrental rates.

PurchaseObligations include one purchase order to a supplier for material.

OtherLong-Term Liabilities of $8.5 million includes: (i) a $5.0 million payment duein June 2007 to GE Healthcare pursuant to intellectual property licenseagreement and (ii) pursuant to the Schering intellectual property acquisitionagreement, as amended, a $1.5 million payment due in May 2007, $1.0 million duein May 2008 and $1.0 million due in May 2009. The $8.5 million amount excludes contingent milestone and royaltyobligations.

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**CriticalAccounting Policies and Estimates**

Our discussion andanalysis of our financial condition and results of operations are based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Onan on-going basis, we evaluate our estimates and judgments, including thoserelated to revenues, accrued expenses, fair valuation of stock related to stock-basedcompensation and income taxes. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

*Revenue.  *We recognize revenue from license arrangements in accordance with StaffAccounting Bulletin No. 104, *Revenue Recognition*(“SAB 104”) and FASB Emerging Issue Task Force Issue No. 00-21, *Accounting for Revenue Arrangements with Multiple Deliverables*(“EITF 00-21”). We recognize revenue from license payments not tied toachieving a specific performance milestone ratably over the period over whichwe are obligated to perform services. The period over which we are obligated toperform services is estimated based on available facts and circumstances. Werecognize revenue from performance payments, when such performance issubstantially in our control and when we believe that completion of suchperformance is reasonably probable, ratably over the period over which weestimate that we will perform such performance obligations. Substantive at-riskmilestone payments, which are based on achieving a specific performance milestonewhen performance of such milestone is contingent on performance by others orfor which achievement can not be reasonably estimated or assured, arerecognized as revenue when the milestone is achieved and the related payment isdue, provided that there is no substantial future service obligation associatedwith the milestone. We do not recognize revenue in connection with licensearrangements until payments are collected or due and reasonably assured ofbeing collected. In addition, we do not recognize revenue in circumstanceswhere the arrangement includes a refund provision until the refund condition isno longer applicable unless, in our judgment, the refund circumstances arewithin our operating control and unlikely to occur. Payments received inadvance of being recognized as revenue are deferred.

In connection withfeasibility studies, contract amounts which are not due until the customeraccepts or verifies the research results are not recognized as revenue untilcustomer acceptance, assuming collectibility is reasonable assured.

We are recognizingcollaboration revenue of $12.0 million associated with the initial license andperformance-based payments under the Nycomed agreement based on an estimatedrecognition period of fifty-four months which is the period over which weestimated that we are obligated to perform services supporting theagreement.  Estimation of thisdevelopment period involves many assumptions, including estimates relating tocompletion of activities for which we are reliant on Nycomed to achieve. Ourestimated development recognition period may change again if facts andcircumstances change. Were the estimated development period to beextended, we may be required to record a reduction in cumulative revenuerecognized in our statement of operations in the period in which the change indevelopment period is determined.

Our agreement withNycomed has been modified such that Nycomed has paid us $0.2 million foractivities associated with creating a brand name for Imagify and relatedtrademark activities and paid us $1.8 million to support the validation of theour commercial manufacturing facility for Imagify. These amounts wereoriginally scheduled to be paid to us upon Nycomed’s filing for regulatoryapproval of Imagify in Europe. While the amounts are not refundable, we havedeferred recognition of these amounts until after the original regulatoryfiling milestone has been achieved. Payments received for current and potentialHDDS and PDDS feasibility studies, which are offset by costs incurred for suchstudies, are recognized as revenue over the estimated performance period ofeach such study. A change in these estimates could result in a significantchange to the amount of revenue recognized in future periods. In addition, if theNycomed collaboration agreement is terminated for reasons other than certainnon-performance by us, we would recognize the remainder of the payments we havereceived or otherwise expect to collect over the amortization period at thetime of termination. We will not recognize revenue associated with thepotential additional $56 million in milestone-based payments that may be earnedunder the Nycomed agreement until the underlying regulatory and salesmilestones are achieved.

*Propertyand Equipment.*   Property and equipment arerecorded at cost and depreciated over their estimated useful lives of three tofive years using the straight-line method. The majority of our equipment isrelated to our ongoing research and development activities, including equipmentwhich, subject to regulatory approvals, we intended to use for commercialmanufacture of Imagify. We consider that this equipment is placed in servicewhen operation of the equipment is started-up and begin depreciating theequipment at this

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time. The equipment inour commercial manufacturing facility is currently undergoing research anddevelopment related activities that result in wear and tear on the equipmentincluding include ongoing calibration and testing.

Leasehold improvementsand equipment under capital leases are recorded at cost. We depreciateleasehold improvements and equipment under capital leases over the lesser oftheir useful lives or the remainder of their respective lease terms. We begandepreciation of leasehold improvements at our Tewksbury facility inOctober 2005 upon receipt of an occupancy permit and taking occupancy ofthe facility. Our leasehold improvements costs on this facility approximate$30.4 million and are being depreciated ratably over remaining term of ourpresent lease, the initial term of which is scheduled in expire inApril 2010. We believe that the use of the initial term of the lease forthe depreciation period, rather than assuming that the lease term is renewed,is appropriate given the inherent uncertainties with a product such as Imagify,which has not yet completed its phase 3 clinical trials and requires regulatoryapprovals before it can be marketed.  The Risk Factors included underSection 1A of Part II of this document discuss the uncertaintiesassociated with Imagify.

*AccruedExpenses.*   As part of the process of preparingconsolidated financial statements we are required to estimate accrued expenses.This process involves identifying services which have been performed on ourbehalf and estimating the level of service performed and the associated costincurred for such service as of each balance sheet date in our consolidatedfinancial statements. Examples of estimated expenses for which we accrueinclude professional service fees, such as lawyers and accountants, andcontract service fees such as amounts paid to clinical monitors, datamanagement organizations and investigators in conjunction with clinical trials,and fees paid to consultants used in the qualification of our commercialmanufacturing facility for Imagify. In connection with such service fees, ourestimates are most affected by our understanding of the status and timing ofservices provided relative to the actual levels of services incurred by suchservice providers. The majority of our service providers invoice us monthly inarrears for services performed. In the event that we do not identify certaincosts which have begun to be incurred or we under- or over-estimate the levelof services performed or the costs of such services, our reported expenses forsuch period would be too low or too high. The date on which certain servicescommence, the level of services performed on or before a given date and thecost of such services are often judgmental, but have not varied materially fromactual costs incurred. We make these judgments based upon the facts andcircumstances known to us in accordance with accounting principles generallyaccepted in the United States of America.

*Stock-BasedCompensation and Other Equity Instruments.  * Weaccount for stock-based compensation in accordance with the fair valuerecognition provisions of FAS 123R, “*Share Based Payment*”.Under FAS 123R, stock-based compensation cost is measured at the grantdate based on the value of the award and is recognized as expense over theappropriate vesting period. Determining the fair value of stock-based awards atthe grant date requires judgment, including estimating the expected term ofstock options, the expected volatility of our stock and expected dividends. Inaddition, judgment is required in estimating the amount of stock-based awardsthat are expected to be forfeited. If actual results differ significantly fromthese estimates or different key assumptions were used, it could have amaterial effect on our Consolidated Financial Statements. See Note 3 ofthe Notes to the Consolidated Financial Statements for additional informationregarding stock-based compensation expense.

Prior to adopting theprovisions of FAS 123R, we recorded estimated compensation expense for employeestock options based upon their intrinsic value on the date of grant pursuant toAccounting Principles Board Opinion 25 (“APB 25”), “*Accountingfor Stock Issued to Employees*” and provided the required pro formadisclosures of FAS 123. Because we established the exercise price based on thefair market value of our stock at the date of grant, the stock options had nointrinsic value upon grant, and therefore no estimated expense was recorded forstock option expense prior to adopting FAS 123R. Conversely, when the exerciseprice for accounting purposes was below fair value of our common stock at thedate of grant, a non-cash charge to compensation expense was recorded ratablyover the term of the option vesting period in an amount equal to the differencebetween the value calculated using the exercise price and the fair value. Wedid issue options prior to its initial S-1 filing in July 2003 at valuesless than fair market. These grants resulted in the recording of deferredcompensation, all of which was expensed as of March 31, 2007.  Stock options are not included in thecalculation of diluted net loss per common share due to the antidilutive effectof the stock options for all periods presented.

Accounting for equityinstruments granted or sold by us under APB No. 14, APB No. 25,FAS 123 and EITF No. 96-18 requires fair value estimates of theequity instrument granted or sold. If our estimates of the fair value of theseequity instruments are too high or too low, it would have the effect of overstatingor understating expenses. When equity instruments are granted or sold inexchange for the receipt of goods or services and the value of those goods orservices can be readily estimated, we use the value of such goods or servicesto determine the fair value of the equity instruments. When equity instrumentsare granted or sold in exchange for the receipt of goods or services and thevalue of those goods or services can not be readily estimated, as is true inconnection with most stock options and warrants granted to employees ornon-employees, we estimated the fair value of the equity instruments based uponconsideration of factors which we deemed to be relevant at the time using cost,market and/or income approaches to such valuations.

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The fair values of allstock option grants issued were determined using a Black-Scholes model in whichwe are required to make assumptions for the risk-free interest rate, theexpected volatility of the underlying stock, forfeiture rates and expected lifeof option grants.  The risk-free ratesare the weighted average of the yield rates on 5-year U.S. Treasury noteson the dates of the stock option grants. We used the historical volatility ofour market-traded stock for the expected volatility assumption. Forfeiturerates are calculated based on actual historical forfeitures.  The expected life of employee stock optionsrepresents the weighted-average period the stock options are estimated toremain outstanding. The expected life of employee stock options is, in part, afunction of the options’ remaining contractual life and the extent to which theoption is in-the-money (i.e., the average stock price during the period isabove the strike price of the stock option). We estimate that, based on thesevariables, options are likely on average to be exercised in approximately 5years from the date of grant.

*DerivativeLiabilities.  * The terms of our February 2005convertible preferred stock offering and our March 2005 MassDevelopmentloan agreement contain features considered to be embedded derivatives which arerecorded at estimated fair value in accordance with FAS 133. The estimation ofthis fair value includes various assumptions and estimates, includingassumptions and estimates of risk free interest rates, stock price volatilityand the timing of future preferred stock conversions. Changes in theseestimates and assumptions can increase or decrease the value of this derivativeliability.  The unrealized gain or loss of the derivative financialinstrument is included in our statement of operations. The convertiblepreferred stock terms include a dividend make-whole payment provision, whichhas been initially recorded at its estimated fair value. This derivativeliability is reduced upon conversion of the preferred stock as well asdividends declared by our board of directors, if any. The MassDevelopment loanagreement includes a provision for a retroactive interest rate increase in theevent that we achieve certain defined positive operating cash flows. Theinitial fair value of the MassDevelopment loan derivative is being amortizedover a term beginning with the loan agreement effective date and ending withthe estimated payment date of the retroactive interest. The fair value of bothderivative liabilities are re-measured at each reporting period.

*IncomeTaxes.  * As part of the process of preparing ourconsolidated financial statements we are required to estimate our income taxesin each of the jurisdictions in which we operate. This process involves usestimating our actual current tax exposure together with assessing temporarydifferences resulting from differing treatments of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities. Inaddition, as of December 31, 2006, we had federal tax net operating losscarryforwards of $70.8 million, which expire through 2026.  We also have research and development creditcarryforwards of $8.1 million. We have recorded a valuation allowance to fullyoffset against these otherwise recognizable net deferred tax assets due to theuncertainty surrounding the timing of the realization of the tax benefit. Inthe event that we determine in the future that we will be able to realize allor a portion of its net deferred tax benefit, an adjustment to deferred taxvaluation allowance would increase net income in the period in which such adetermination is made. The U.S. Tax Code contains provisions that may limit theutilization of net operating loss carryforwards and credits available to beused in any given year in the event of significant changes in ownershipinterest, as defined.

**RecentlyIssued Accounting Pronouncements**

In June 2006 the FASB issued FASB Interpretation (“FIN”) No. 48, “*Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement 109”.* FIN 48 prescribes acomprehensive model for recognizing, measuring, presenting and disclosing inthe financial statements tax positions taken or expected to be taken on a taxreturn, including a decision whether to file or not to file in a particularjurisdiction. FIN 48 also provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition and defines the criteria that must be met for thebenefits of a tax position to be recognized. FIN 48 is effective forfiscal years beginning after December 15, 2006. Changes in net assets as aresult of application of FIN 48 must be accounted for as an adjustment toopening retained earnings. We have completed our initial evaluation of the impactof the January 1, 2007 adoption of FIN 48 and determined that such adoption isnot expected to have a material impact on our financial position or resultsfrom operations.

 

In September 2006, FASB issued SFAS (FAS) No. 157, “*Fair Value Measurements*,” which is effectivefor financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The purpose of FAS 157 isto clarify and set forth consistent rules for defining fair value, establishinga framework for measuring fair value in generally accepted accountingprinciples and expanding disclosures about fair value measurements. FAS 157applies under other accounting pronouncements that require or permit fair valuemeasurements where those accounting pronouncements have determined that fairvalue is the relevant measurement attribute. FAS 157 does not require any newfair value measurements, but for some entities the application of FAS 157 couldchange current practice.  We arecurrently assessing what impact, if any, the adoption of this statement willhave on our consolidated financial statements.

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In February 2007,the FASB issued SFAS No. 159, *“The Fair Value Option forFinancial Assets and Financial Liabilities,”* which is effective as of the beginning of an entity’sfirst fiscal year beginning after November 15, 2007.  This statement allows the measurement at fairvalue of financial instruments and certain other items that are currently notrequired to be measured at fair value. The objective of FAS 159 is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. The fair value option established by this Statement permits themeasurement of eligible items at fair value at specified election dates, withunrealized gains and losses on the items for which the fair value option hasbeen elected reported in earnings at each subsequent reporting date. We arecurrently assessing what impact, if any, the adoption of this statement willhave on our consolidated financial statements.

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We have not usedderivative financial instruments for speculative or trading purposes. However,we are exposed to market risk related to changes in interest rates. Our currentpolicy is to maintain an investment portfolio consisting mainly of U.S. moneymarket and government-grade securities, directly or through managed funds, withmaturities of one year or less. Our cash is deposited in and invested throughhighly rated financial institutions in North America. Our cash equivalents aresubject to interest rate risk and will fall in value if market interest ratesincrease. If market interest rates were to increase immediately and uniformlyby 10% from levels at March 31, 2007, we estimate that the fair value ofour investment portfolio would decline by an immaterial amount. We currently havethe ability to hold our fixed income investments until maturity, and thereforewe do not expect our operating results or cash flows to be affected to anysignificant degree by the effect of a change in market interest rates on ourinvestments. Our equipment loans and capital leases are not subject to interestrate fluctuations because the interest rates are fixed at the time ofborrowing.

**Effectsof Inflation**

Our assets are primarilymonetary, consisting of cash, cash equivalents and short-term investments. Becauseof their liquidity, these assets are not directly affected by inflation. Wealso believe that we have intangible assets in the value of our technology. Inaccordance with generally accepted accounting principles, we have notcapitalized the value of this intellectual property on our consolidated balancesheet. Due to the nature of this intellectual property, we believe that theseintangible assets are not affected by inflation. Because we intend to retainand continue to use our equipment, furniture and fixtures and leaseholdimprovements, we believe that the incremental inflation related to replacementcosts of such items will not materially affect our operations. However, therate of inflation affects our expenses, such as those for employee compensationand contract services, which could increase our level of expenses and the rateat which we use our resources.

**ITEM4. CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

As of the end of theperiod covered by this report, our management, with the participation our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour disclosure controls and procedures pursuant toRule 13a-15(b) promulgated under the Securities Exchange Act of 1934,as amended, or the Exchange Act. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of theevaluation date, our disclosure controls and procedures were effective inensuring that material information required to be disclosed by us in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms, including ensuring that suchmaterial information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

**Changesin Internal Control Over Financial Reporting**

During the period coveredby this report, there have been no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II. OTHER INFORMATION**

**ITEM1. LEGAL PROCEEDINGS**

None

**ITEM1A. RISK FACTORS**

**CertainFactors Which May Affect Future Results**

*Ouroperating results and financial condition have varied in the past and may inthe future vary significantly depending on a number of factors. Except for thehistorical information in this report, the matters contained in this reportinclude forward-looking statements that involve risks and uncertainties. Thefollowing factors, among others, could cause actual results to differmaterially from those contained in forward-looking statements made in thisreport and presented elsewhere by management from time to time. Such factors,among others, may have a material adverse effect upon our business, results ofoperations and financial condition.*

*In Item 1A (“RiskFactors”) of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006, which was filed with the Securities and Exchange Commission on March 16, 2007, we describerisk factors related to the Company.  For convenience, our updated risk factors areincluded below in this Item 1A.  Otherthan the risk factors titled:*

·                  *“We have not generated any product revenue to date, have a history ofoperating losses and our capitalized resources are limited,”*

·                  ***“****Failure to obtainregulatory approvals for our product candidates under development, inparticular our lead product candidate**Imagify, forwhich we missed endpoints in each of our pivotal trials, would have amaterial adverse effect on our business,”*

·                  *“We may need to enroll morepatients in future clinical trials, and any such additional enrollment wouldrequire additional expenditures, which may be material, and would likely resultin a delay of our submitting an NDA with the FDA for**Imagify,”*

·                  *“We have removed our**Imagify manufacturing equipment from the facilities of our third partycontract manufacturer and currently have no facility within which tomanufacture Imagify until the new commercial manufacturing facility is qualified or untilother arrangements are made,” and*

·                  *“Our potential producttrade names may not be acceptable to FDA,”*

***t****here have been no material changes in our riskfactors from those disclosed in Part II. Item 1A of our Annual Report on Form10-K for the fiscal year ended December 31, 2006.*

**RisksRelated to Our Company**

***We have not generated any product revenue to date, have ahistory of operating losses and our capital resources are limited.***

We are focused on productdevelopment and we have not generated any revenue from commercial sales of ourproducts to date. We have incurred losses each year of our operations. For thethree months ended March 31, 2007, we had a net loss available to holders ofcommon stock of $13.1 million. AtMarch 31, 2007 we had an accumulated deficit of $293.7 million. We expectour research and development, general and administrative and sales andmarketing expenses will increase over the next several years.

We expect to continue to incur losses and capitalexpenditures for the foreseeable future. We also anticipate cash outflow fromdebt repayment and payment of other obligations, including dividends payable onour outstanding shares of 6.5% convertible exchangeable preferred stock. Webelieve, based on our operating plans, that unless we elect to reduce ourcurrent rate of spending and forego pursuit of milestones on our currentschedule, we will within the next twelve months require significant additionalcapital to fund our operations, including developing products, conductingclinical trials, achieving regulatory approvals, qualifying commercialmanufacturing space and, subject to regulatory approval, commercially launchingImagify, or other product candidates under development or future productcandidates. We may raise this additional capital through public or privatesales of equity, or from borrowings, or from strategic partners.

As a result of ourlimited capital resources, we may elect to delay the funding of certaindevelopment activities, including those leading to the submission of our NDAfor Imagify, which would result in a delay in the commercialization of Imagify.Any such delay in the submission of an NDA or commercialization of Imagifywould have a material adverse impact on our business and would likely have amaterial adverse effect on the market price of our common stock. To address ourcapital needs, we may elect to raise funds

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through public or privatesales of equity or from borrowings or from strategic partners. Additionalequity financing, if available, may be dilutive to our stockholders; debtfinancing, if available, may involve significant cash payment obligations andcovenants that restrict our ability to operate our business; and strategicpartnerships, if available, may result in royalties or other terms which reduceour economic potential from products under development. In addition, thirdparties may attempt to acquire us at valuations our board of directors orstockholders may not find attractive.  Ifour capital resources are not sufficient to fund our planned operations for atwelve month period at the time the audit for our 2007 financial results iscomplete, our auditor will likely include in its audit report, to be includedin our annual report on Form 10-K, an explanatory paragraph regardingsubstantial doubt relating to our ability to continue as a going concern. Anysuch qualification of the report of our auditors may have a material adverseeffect on our ability to raise capital and may have a material adverse effecton the market price of our common stock.

***We need to allocate significant amounts of our availablecapital resources to make payments on our outstanding indebtedness andequipment lease obligations, our patent transfer agreement with ScheringAktiengesellschaft, our patent license agreement with GE and as dividends onour 6.5% convertible exchangeable preferred stock, which in turn could reduceour financial flexibility and ability to fund other activities.***

As of April 15, 2007, wehad approximately $21.8 million in aggregate principal indebtedness outstandingrelated to capital lease obligations, notes payable, and other long-termobligations.****As of May 7, 2007, we hadoutstanding 690,000 shares of our 6.5% convertible exchangeable preferredstock, which shares accrue cumulative cash dividends at the annual rate of$3.25 per share, payable quarterly on the first day of March, June, September,and December. These payments will:

·                  reduce theavailability of our capital to fund our clinical trials for Imagify, thequalification of our commercial manufacturing space in Tewksbury, Massachusettsand for working capital and other general corporate purposes and may requireus, in order to meet these obligations, to delay or reduce expenditures orforego business opportunities; and

·                  potentiallyimpair our ability to obtain additional financing.

To address our capitalneeds, we may elect to raise funds through public or private sales of equity orfrom borrowings or from strategic partners. Additional equity financing, ifavailable, may be dilutive to our stockholders; debt financing, if available,may involve significant cash payment obligations and covenants that restrictour ability to operate as a business; and strategic partnerships, if available,may result in royalties or other terms which reduce our economic potential fromproducts under development.

***Failure to obtain regulatory approvals for our productcandidates under development, in particular our lead product candidate******Imagify, for which we missed endpoints in each ofour pivotal trials, would have a material adverse effect on our business.***

We must receiveregulatory approval of each of our product candidates before we cancommercialize or sell that product candidate. The pre-clinical laboratorytesting, formulation development, manufacturing and clinical trials of anyproduct candidates we develop independently or in collaboration with thirdparties, as well as the distribution and marketing of these product candidates,are regulated by numerous federal, state and local governmental authorities inthe United States, principally FDA, and by similar agencies in other countries.The development and regulatory approval process takes many years, requires theexpenditure of substantial resources, is uncertain and subject to delays, andcould thus delay our receipt of revenues, if any, from any of our productcandidates.

The data obtained fromclinical and pre-clinical activities are subject to varying interpretationsthat could delay, limit or prevent regulatory agency approval. In particular,we can not assure you that our planned NDA for Imagify will be accepted by FDAnor can  we assure you that our Imagifyclinical results will successfully address the requirements of FDA sufficientlyfor us to obtain regulatory approval. No product can receive FDA approvalunless human clinical trials show both safety and efficacy for each targetindication in accordance with FDA standards. FDA analysis of results includeboth quantitative and qualitative analysis. In both our RAMP-1 and RAMP-2clinical trial results, we achieved the principal primary endpoint of accuracybut failed to achieve one of the two component primary endpoints in each trial(sensitivity in RAMP-1 and specificity in RAMP-2).  The FDA may look at these trials separatelyrather than in their totality and may not approve Imagify based  upon these missed endpoints. We cannotpredict whether FDA will approve Imagify based upon the available results or whetherFDA will seek additional data as a condition to approval or whether they willapprove Imagify at all.

Our RAMP-1 and RAMP-2 clinicaltrial results are based upon our statistical analysis plans for those trials.These statistical analysis plans, including calculations of statisticalsignificance, were created based on a variety of factors, including feedbackfrom our discussions with FDA, the input of our regulatory consultants and ourown knowledge and past experience in these and similar matters. We anticipatethat the FDA will evaluate the quality and independence of the manner in whichour Imagify clinical trials were conducted. In recent years, other companiesseeking approval for their contrast agents have encountered difficultiesconvincing FDA

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that the comparative ortruth standards that they used in their clinical trials met acceptable levelsof quality, consistency or other standards acceptable to the FDA. In suchcases, these issues were reported to be contributing factors in the failure ofsuch product candidates to be approved. If the FDA, upon review, has concernabout the quality of the manner in which our RAMP-1 or RAMP-2 trial wasconducted, or has concerns about the results of the nuclear stress tests orcoronary angiography used as a comparator and truth standard in these trials,this could delay or prevent FDA approval of Imagify based upon our currenttrial results. There can be no assurance that FDA will accept our statisticalanalysis without modification.  How,when, or if such matters are resolved may affect whether Imagify is approvedfor the indication that we are seeking, the timing of such approval, or whetherImagify is approved at all.   Inaddition, in conjunction with approving products, it is common for regulatoryagencies to impose limits on how such products can be used and marketed. We anticipate that if and when Imagify and other product candidates areapproved that the initial use and marketing of these products may be limited atleast until such time as we conduct additional clinical studies or informationotherwise becomes available to address the underlying reasons for suchlimitations.

We may encounter delaysor rejections based on changes in regulatory agency policies or personnelduring the period in which we develop a drug or the period required for reviewof any application for regulatory agency approval of a particular compound. Ourcontinuing efforts to comply with these changes could lead to delays orrejections of our clinical trials. We also may encounter delays in the event weare unable to produce clinical trial material in sufficient quantities and ofsufficient quality to meet the schedule for our planned clinical trials. Inaddition, we rely on a number of third parties, such as clinical researchorganizations, to help support the clinical trials by performing independentclinical monitoring, data acquisition and data evaluations. Any failure on thepart of these third parties could delay the regulatory approval process.

Failure to obtainregulatory approval or any delay or setback in obtaining regulatory agencyapprovals could:

·                  adversely affectour ability to market any drugs we develop independently or with collaborativepartners;

·                  imposeadditional costs and diminish any competitive advantages that we may attain; or

·                  adversely affectour ability to generate royalties.

Failure to obtainapproval for our lead product candidate, Imagify, or delay in such approval,would delay our receipt of product revenues and would have a material adverseaffect our business, financial condition and results of operations.  Our stock price would also be materiallyadversely affected.

***Adverseevents are likely to be encountered in our clinical trials and these eventscould delay, limit or prevent regulatory approval.***

Many of the patients inour Imagify clinical trials have coronary artery disease. When we conductfuture Imagify clinical studies, patients will be exposed to potential safetyrisks associated with a stress test, including risks associated with apharmacological stressor, and Imagify. Given the nature of Imagify clinicaltrials, including the cumulative administration of Imagify to larger numbers ofat-risk patients and administering Imagify to patients with coexisting disease,adverse events are expected to be encountered during the clinical trials.Adverse events are also likely to be encountered in clinical trials for ourother products, which clinical trials may also include at-risk patients. Whensignificant adverse events are detected and these events are attributable toour products, such events could delay, limit or prevent regulatory agencyapproval.

***Ourcollaborative partners may not obtain regulatory approvals in other countries,which may have an adverse effect on our business .***

We cannot be certain thatwe or our partners will obtain any regulatory approvals in other countries andthe failure to obtain these approvals would have a material adverse affect onour business, financial condition and results of operations. In order to marketour products outside of the United States, we and our current, and potentialfuture, collaborative partners must establish and comply with numerous andvarying regulatory requirements of other countries regarding safety andefficacy. The approval procedures vary among countries and can involveadditional product testing and additional administrative review periods. Thetime required to obtain approval in other countries might differ from thatrequired to obtain FDA approval. The regulatory approval process in othercountries may include all of the risks associated with obtaining FDA approvaldetailed above. Approval by FDA does not ensure approval by the regulatoryauthorities of other countries. In addition, many countries outside the UnitedStates require a separate review process prior to marketing to determinewhether their national health insurance schemes will pay for newly approvedproducts, as well as the price which may be charged for a product.

***We may need to enroll more patients in future clinicaltrials, and any such additional enrollment would require additionalexpenditures, which may be material, and would likely result in a delay of oursubmitting an NDA with the FDA for******Imagify.***

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If discussions with FDAlead us to conclude that further clinical trials of Imagify are required toachieve NDA approval, such trials may affect the timing of NDA submission orapproval and would incur significant costs. We cannot assure that the performance of additional trials would leadultimately to NDA approval. Moreover, we currently do not possess sufficientinventory of Imagify to conduct any such trial, and would need to contract forthe manufacture of such material.  We maynot be able to obtain sufficient quantity of such material in a timely fashionor on commercially reasonable terms, or at all. Our inability to conduct additional clinical trials for Imagify in atimely fashion, or at all, resulting from of our inability to manufacture orobtain clinical trial materials would have material adverse effect on ourbusiness.

***If we cannot raise additional capital on acceptable terms,we may be unable to complete planned clinical trials, obtain regulatoryapprovals or commercialize our product candidates.***

We will requiresubstantial future capital in order to continue to conduct the research anddevelopment, clinical and regulatory activities necessary to bring our productcandidates to market and to establish commercial manufacturing, marketing andsales capabilities. Our future capital requirements will depend on manyfactors, including the:

·      progress of pre-clinical development andlaboratory testing and clinical trials;

·      timing of construction and size to whichwe expand our manufacturing capabilities;

·      time and costs involved in obtainingregulatory approvals;

·      number of product candidates we pursue;

·      costs involved in filing and prosecutingpatent applications and enforcing or defending patent claims; and

·      establishment of selected strategicalliances and activities required for product commercialization.

We may seek additionalfunding through strategic collaborations or through private or public sales of our securities or by licensing all ora portion of our technology. This funding may significantly dilute existingstockholders or may limit our rights to our technology.

We cannot assure you thatwe can obtain additional funding on reasonable terms, or at all. If we raiseadditional funds by issuing equity securities, our stock price may decline, ourexisting stockholders may experience significant dilution, and the newly issuedsecurities may have rights superior to those of our common stock. If we raiseadditional funds by issuing debt, we may be subject to limitations on ouroperations and such debt may have rights senior to the debentures, if issued.If we cannot obtain adequate funds, we may:

·      terminate or delay clinical trials for oneor more of our product candidates;

·      delay our establishment of sales,marketing and/or manufacturing capabilities;

·      curtail significant product developmentprograms that are designed to identify new product candidates;

·      relinquish rights to our technologies orproduct candidates;

·      terminate or delay qualification of ourcommercial manufacturing facility; and/or

·                  terminate ordelay development of one or more of our product candidates, including Imagify,and discontinue operations of all or a portion of our operations.

Any of these could have a material adverse effect onour business, financial condition and results of operations. Our stock pricecould also be materially adversely affected.

***Our products, if approved, may fail to achieve marketacceptance.***

There can be no assurancethat any products we successfully develop, if approved for marketing, willachieve market acceptance or generate significant revenues. Each of our productcandidates is intended to replace or alter existing therapies or procedures,and hospitals, physicians or patients may conclude that these products are lesssafe or effective or otherwise less attractive than these existing therapies orprocedures. For example, our lead product candidate, Imagify, is acardiovascular drug for use in ultrasound imaging procedures which will competewith existing nuclear imaging and cardiac ultrasound. Hospitals, physicians orpatients may prefer these existing procedures to Imagify-enhanced cardiacstress ultrasound imaging. If our products do not receive market acceptance forany reason, it would adversely affect our business, financial condition andresults of operations.  In such event, wemay elect to conduct additional clinical trials designed to demonstrate theeffectiveness of Imagify in circumstances not studied in our Phase 3 clinicaltrials.  Any such studies will likely beexpensive and time consuming. Further, our competitors may develop newtechnologies or products that are more effective or less costly, or that seemmore cost-effective, than our products. We can give no assurance that hospitals,physicians, patients or the medical community in general will accept and useany products that we may develop.

***We have never manufactured any of our product candidates incommercial quantities, and if we fail to develop an effective manufacturingcapability for our products, including our lead product candidate******Imagify, we may be unable to commercialize theseproducts.***

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We have no experience inmanufacturing our products for commercial use and limited experience indesigning equipment for the manufacture of our products. We are working tostart-up and qualify operations at a commercial manufacturing facility inTewksbury, Massachusetts and to demonstrate that we can produce Imagify at acommercial manufacturing scale prior to our filing of a NDA for Imagify and,subject to required regulatory approvals, we intend to manufacture Imagify inthis facility for commercial use. We can not assure you that we will be able toobtain the necessary regulatory approvals for such commercial manufacture, atall or in a timely or economical manner. Our intention to manufacture Imagifyor other products exposes us to the following risks, any of which could delayor prevent the approval of our products by FDA or corresponding state andforeign agencies, or the commercialization of our products, or result in highercosts or inability to meet demand for Imagify leading to potential revenueloss, and any of which would have a material adverse impact on our business,financial condition and results of operations.

·              Manufacturers are obliged tomanufacture in highly controlled environments and to operate in accordance withFDA and international mandated current good manufacturing practices, or cGMPs.For our clinical trials we have relied on contract manufacturers for such facilitiesand cGMP compliance. Creation and qualification of a commercial manufacturingenvironment requires significant expertise and capital resources, including thedevelopment of advanced manufacturing techniques and process controls and issubject to local and state planning approvals. Manufacturers of pharmaceuticalproducts often encounter difficulties in constructing and qualifying newmanufacturing facilities and in production, especially in scaling-up initialproduction. A failure to establish and follow cGMPs and to document adherenceto such practices may lead to significant delays in the availability ofmaterial for our NDA filing or commercial production for Imagify and may delayor prevent filing or approval of marketing applications for our products or theability to continue to manufacture the products. Certain of these delays wouldfurther require us to continue to operate this facility and incur relatedcosts.

·              Manufacture of our productcandidates, in preparation for filing a NDA and for commercial production, willeach initially require and rely on a single commercial manufacturing site,directly or through a contract manufacturer, without the backup of a secondsite that is qualified for commercial manufacture of the product. Qualificationof another manufacturing site can be expensive and time consuming. Prior tousing product from a new manufacturing site, we must demonstrate to FDA andcorresponding state and foreign agencies that the specifications for theproduct are consistent with the specifications for the product as it wasmanufactured at a prior qualified site or we must clinically or otherwisedemonstrate that the safety and efficacy of the product produced in the newmanufacturing site is consistent with the product as it was manufactured at theprior site. Demonstrating such consistency may be difficult, expensive or timeconsuming. In addition, before we would be able to produce product forcommercial use at a new facility, it will have to undergo a pre-approvalinspection by FDA and corresponding state and foreign agencies. Once approved,drug manufacturers are subject to ongoing periodic unannounced inspection byFDA and corresponding state and foreign agencies to ensure strict compliancewith cGMPs, other government regulations and corresponding foreign standards.Failure to maintain compliance with cGMP or with safety or environmentalregulations could result in penalties, product recalls or restrictions on theuse of the manufacturing site.

We have a singlemanufacturing facility. This facility and the manufacturing equipment we use toproduce Imagify would be difficult to replace and could require substantiallead-time to repair or replace in the event of a regulatory, manufacturing,catastrophic event or similar problem. In such event, we would be forced torely on third-party manufacturers and there would likely be substantial delaybefore we would be able to restart production. Although we possess insurancefor damage to our property and the disruption of our business from casualties,such insurance may not be sufficient to cover all of our potential losses,including potential damage to our reputation, and may not continue to beavailable to us on acceptable terms, or at all. In addition, future growth mayoutpace our manufacturing capacity, in which event we would need to locate,obtain and build-out additional space. New or alternative facilities may not beavailable to us on acceptable terms. Even if we are able to identify such newor alternative facilities, we may incur additional costs and we may experiencea disruption in the supply of our products until those facilities areavailable.

***Failure to manufacture our products in commercial quantitiescould damage our European partnership***

Under the terms of ourcollaboration agreement with Nycomed, we are responsible for the commercialmanufacture of Imagify for marketing and sale by Nycomed in Europe. Failure tomanufacture Imagify in a timely manner or on an economic basis, or insufficient quantities, could jeopardize our relationship with Nycomed. We donot currently have a European sales force, nor do we have experience withregard to the commercialization, marketing, sale or distribution ofpharmaceutical products in Europe, and we rely entirely on Nycomed for thisexpertise. Any termination of our relationship with Nycomed would have amaterial adverse impact on our business, financial condition and results ofoperations.

***We may not be able to manufacture our products in commercialquantities, which would prevent us from marketing our products.***

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To date our productcandidates have been manufactured in small quantities for pre-clinical andclinical trials. If any of these product candidates are approved by FDA orforeign regulatory authorities for commercial sale, we will need to manufacturethem in larger quantities. For Imagify, it is our intention to seek regulatoryapproval after we have demonstrated that we can manufacture Imagify at a largerbatch scale than is being used for clinical trial materials. Manufacturers oftenencounter difficulties in achieving volume production, quality control andquality assurance. Accordingly, we might not be able to manufacture sufficientquantities of drugs to meet our clinical schedules or to commercialize ourproducts.  We cannot assure you that wewill be able to successfully increase the manufacturing capacity or manufactureat a larger batch scale, whether on our own or in collaboration with thirdparty manufacturers, for any of our product candidates in a timely or economicmanner, or at all. Significant scale-up of manufacturing may require certainadditional validation studies, which FDA must review and approve. If we areunable to successfully increase the manufacturing capacity for a productcandidate, the regulatory approval or commercial launch of that productcandidate may be delayed or there may be a shortage in supply of that productcandidate. Our product candidates require precise, high-quality manufacturing.Our failure to achieve and maintain these high manufacturing standards,including controlling the incidence of manufacturing errors and maintainingreliable product packaging for diverse environmental conditions, could resultin patient injury or death, product recalls or withdrawals, delays or failuresin product testing or delivery, cost overruns or other problems that couldseriously hurt our business.

Our commercialmanufacturing facility in Tewksbury, Massachusetts is designed to meet ourestimated initial commercial demand for Imagify. The facility is being initiallyequipped to run one production line. In order to support greater productioncapacity, this production line is designed to support a larger lyophilizer(pharmaceutical freeze dryer which can be operated under sterile conditions) inaddition to the one that has been initially installed. Purchasing, installingand qualifying manufacturing equipment, such as a lyophilizer, typicallyrequires significant lead times and temporary discontinuation of production.Also in the future we may need to add additional production lines at theTewksbury site or elsewhere to meet potential commercial demand for Imagify. Wehave made no commitment to such additions at this time. The cost of suchadditions can be significant. There can be no assurance that our capacity estimateswill be achieved. Any such additions would increase our operating spending,increase our capital requirements and reduce our resources available fordevelopment activities.

***We have removed our******Imagify manufacturing equipment from the facilitiesof our third party contract manufacturer and currently have no facility withinwhich to manufacture Imagify until the new commercial manufacturing facility isqualified or until other arrangements are made.***

We have removed ourImagify manufacturing equipment from the facilities of a third-party contractmanufacturer.  Currently, we have nofacility within which to manufacture Imagify until the new commercialmanufacturing facility is qualified or until other arrangements are made. Wehave no existing inventory of Imagify on-hand and would need to produceadditional material for future clinical trials. If we lack sufficient inventoryof Imagify clinical trial material to perform clinical trials or are unable tomanufacture sufficient inventory on a timely basis, our program could beadversely impacted or delayed. These delays could have a material adverseeffect on our business, financial condition and results of operations.

***If third-party manufacturers of our products candidates failto devote sufficient time and resources to our concerns, or if theirperformance is substandard, our clinical trials may be delayed and our costsmay rise.***

We may rely substantiallyon third-party contract manufacturers to supply, store and distribute ourproduct candidates for our clinical trials and other development needs. Ourreliance on these third-party manufacturers will expose us to the followingrisks, any of which could delay or prevent the completion of our clinicaltrials, the approval of our products by FDA, or the commercialization of ourproducts, result in higher costs, or deprive us of additional productcandidates, and any of such effects would have a material adverse impact on ourbusiness, financial condition and results of operations.

·      Contract manufacturers often encounterdifficulties in achieving volume production, quality control and qualityassurance, as well as shortages of qualified personnel. Accordingly, amanufacturer might not be able to manufacture sufficient quantities of drugs tomeet our clinical schedules.

·      Contract manufacturers are obliged tooperate in accordance with FDA-mandated current good manufacturing practices,or cGMPs. A failure of these contract manufacturers to establish and followcGMPs and to document their adherence to such practices may lead to significantdelays in the availability of material for clinical study and may delay orprevent filing or approval of marketing applications for our products.

·      For production of clinical trial materialfor each of our current product candidates we will initially rely on a singlemanufacturer. Changing these or future manufacturers may be difficult and thenumber of potential manufacturers is limited. Changing

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manufacturers may require re-validation of the manufacturing processesand procedures in accordance with FDA-mandated cGMPs. Such re-validation may becostly and time-consuming. It may be difficult or impossible for us to findreplacement manufacturers on acceptable terms quickly, or at all.

·      Our contract manufacturers may not performas agreed or may not remain in the contract manufacturing business for the timerequired to produce, store and distribute our products successfully. Ourmanufacturing levels, while important to us, can represent relatively smallfractions of the overall business of most qualified contract manufacturers. Asa result, the contract manufacturers may not provide us with the attention thatwe need or may be unwilling to adapt to necessary changes in our manufacturingrequirements.

Drug manufacturers aresubject to ongoing periodic unannounced inspection by FDA and correspondingstate and foreign agencies to ensure strict compliance with cGMPs, othergovernment regulations and corresponding foreign standards. While we areobligated to audit the performance of third party contractors, we do not havecontrol over our third-party manufacturers’ compliance with these regulationsand standards. Failure by our third-party manufacturers or us to comply withapplicable regulations could result in sanctions being imposed on us, includingfines, injunctions, civil penalties, failure of the government to grant marketapproval of drugs, delays, suspension or withdrawal of approvals, seizures orrecalls of product, operating restrictions and criminal prosecutions, any ofwhich could significantly and adversely affect our business.

***Materials necessary to manufacture our products may not beavailable, which may delay our development and commercialization activities.***

Only a few facilitiesmanufacture some of the raw materials necessary to manufacture our products. Ifwe need to purchase a raw material that is in limited supply for our clinicaltrials, or for commercial distribution if we obtain marketing approval of aproduct candidate, we cannot assure you that one or more suppliers would beable to sell us that raw material at the time we need it and on commerciallyreasonable terms. If we change suppliers for any of these materials or any ofour suppliers experiences a shutdown or disruption in the facilities used toproduce these materials, due to technical, regulatory or other problems, itcould harm our ability to manufacture our products or receive regulatoryapproval.

***We have no experience selling, marketing or distributing ourproducts and no internal capability to do so.***

If we receive regulatoryapproval to commence commercial sale of any product, we will face competitionwith respect to commercial sales, marketing and distribution. These are areasin which we have no experience. To market any of our products directly, we mustdevelop a direct marketing and sales force with technical expertise andsupporting distribution capability. Alternatively, we may engage apharmaceutical or other healthcare company with an existing distribution systemand direct sales force to assist us. There can be no assurance that we willsuccessfully establish sales and distribution capabilities either on our own orin collaboration with third parties or gain market acceptance for our products.To the extent we have or will enter co-promotion or other licensingarrangements, any revenues we receive will depend on the efforts of thirdparties and there can be no assurance that our efforts will succeed.

***Our potential product trade names may not be acceptable toFDA.***

FDA reserves the right toapprove product names prior to commercialization.  We have proposed to FDA the tradenameImagify, as well as an alternative tradename, as a potential product trade namefor our lead product.  FDA has raisedconcerns regarding the name Imagify which, if not resolved, could cause us touse the alternative name which they find acceptable.  Trade names changes could result inadditional cost to us and could adversely affect our preparations forcommercialization of this product which could adversely affect our business,financial condition and results of operations.

***Claims by other parties that we infringe or havemisappropriated their proprietary technology may result in liability fordamages, royalties, or other payments, or stop our development andcommercialization efforts.***

Competitors and otherthird parties may initiate patent litigation against us in the United States orin foreign countries based on existing patents or patents that may be grantedin the future. Many of our competitors have obtained patents covering productsand processes generally related to our products and processes, and they mayassert these patents against us. Moreover, there can be no assurance that thesecompetitors have not sought or will not seek additional patents that may coveraspects of our technology. As a result, there is a greater likelihood of apatent dispute than would be expected if our competitors were pursuingunrelated technologies.

While we conduct patentsearches to determine whether the technologies used in our products infringepatents held by third parties, numerous patent applications are currentlypending and may be filed in the future for technologies generally related toour

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technologies, includingmany patent applications that remain confidential after filing. Due to thesefactors and the inherent uncertainty in conducting patent searches, there canbe no guarantee that we will not violate third-party patent rights that we havenot yet identified.

We know of U.S. andforeign patents issued to third parties that relate to aspects of our productcandidates. There may also be patent applications filed by these or otherparties in the United States and various foreign jurisdictions that relate tosome aspects of our product candidates, which, if issued, could subject us toinfringement actions. In particular, we are aware of U.S. and foreign patentsowned by third parties, including potential competitors, which arguably coveraspects of our Imagify contrast agent. We and several of these parties havebeen actively engaged in opposing the grant of European patents with claimsthat arguably cover aspects of our Imagify product. Parties may contest patentsin Europe prior to contesting the counterpart patents in the United Statesbecause of procedural differences between European and U.S. patent laws as wellas economic considerations.

The owners or licenseesof these and other patents may file one or more infringement actions againstus. In addition, a competitor may claim misappropriation of a trade secret byan employee hired from that competitor. Any such infringement ormisappropriation action could cause us to incur substantial costs defending thelawsuit and could distract our management from our business, even if theallegations of infringement or misappropriation are unwarranted. A need todefend multiple actions or claims could have a disproportionately greaterimpact. In addition, either in response to or in anticipation of any suchinfringement or misappropriation claim, we may enter into commercial agreementswith the owners or licensees of these rights. The terms of these commercialagreements may include substantial payments, including substantial royaltypayments on revenues received by us in connection with the commercialization ofour products. Payments under such agreements could increase our operatinglosses and reduce our resources available for development activities.Furthermore, a party making this type of claim could secure a judgment thatrequires us to pay substantial damages, which would increase our operatinglosses and reduce our resources available for development activities. Ajudgment could also include an injunction or other court order that couldprevent us from making, using, selling, offering for sale or importing ourproducts or prevent our customers from using our products. If a courtdetermined or if we independently concluded that any of our products ormanufacturing processes violated third-party proprietary rights, our clinicaltrials could be delayed and there can be no assurance that we would be able toreengineer the product or processes to avoid those rights, or to obtain alicense under those rights on commercially reasonable terms, if at all.

***If we are unable to protect our intellectual propertyrights, our competitors may develop and market products with similar featuresthat may reduce demand for our products, and we may be prevented fromestablishing collaborative relationships on favorable terms.***

The following factors areimportant to our success:

·      receiving patent protection for ourproduct candidates;

·      maintaining our trade secrets;

·      not infringing on the proprietary rightsof others; and

·      preventing others from infringing ourproprietary rights.

We will be able toprotect our proprietary rights from unauthorized use by third parties only tothe extent that our proprietary rights are covered by valid and enforceablepatents or are effectively maintained as trade secrets.

We try to protect ourproprietary position by filing U.S. and foreign patent applications related toour proprietary technology, inventions and improvements that are important tothe development of our business. Because the patent position of pharmaceuticalcompanies involves complex legal and factual questions, the issuance, scope andenforceability of patents cannot be predicted with certainty. Patents, ifissued, may be challenged, invalidated or circumvented. Thus, any patents thatwe own or license from others may not provide any protection againstcompetitors. Our pending patent applications, those we may file in the future,or those we may license from third parties, may not result in patents beingissued. If issued, they may not provide us with proprietary protection orcompetitive advantages against competitors with similar technology.Furthermore, others may independently develop similar technologies or duplicateany technology that we have developed. The laws of many foreign countries donot protect our intellectual property rights to the same extent as do the lawsof the United States.

We also rely on tradesecrets, know-how and technology, which are not protected by patents, tomaintain our competitive position. We try to protect this information byentering into confidentiality agreements with parties that have access to it,such as our corporate partners, collaborators, employees and consultants. Anyof these parties may breach the agreements and disclose our confidentialinformation or our competitors might learn of the information in some otherway. If any trade secret, know-how or other technology

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not protected by a patentwere to be disclosed to or independently developed by a competitor, ourbusiness and financial condition could be materially adversely affected.

***We may become involved in lawsuits and administrativeproceedings to protect, defend or enforce our patents that would be expensiveand time consuming.***

In order to protect orenforce our patent rights, we may initiate patent litigation against thirdparties in the United States or in foreign countries. In addition, we have beenand continue to be subject to certain opposition proceedings conducted inpatent and trademark offices challenging the validity of our patents and maybecome involved in future opposition proceedings. The defense of intellectualproperty rights, including patent rights through lawsuits, interference oropposition proceedings, and other legal and administrative proceedings can becostly and can divert our technical and management personnel from their normalresponsibilities. Such costs increase our operating losses and reduce ourresources available for development activities. An adverse determination of anylitigation or defense proceedings could put one or more of our patents at riskof being invalidated or interpreted narrowly and could put our patentapplications at risk of not issuing.

Furthermore, because ofthe substantial amount of discovery required in connection with intellectualproperty litigation, there is a risk that some of our confidential informationcould be compromised by disclosure during this type of litigation. For example,during the course of this kind of litigation and despite protective ordersentered by the court, confidential information may be inadvertently disclosedin the form of documents or testimony in connection with discovery requests, depositionsor trial testimony. This disclosure could materially adversely affect ourbusiness and financial results.

***If we are unable to retain key personnel and hire additionalqualified scientific, manufacturing, sales and marketing, and other personnel,we may not be able to successfully achieve our goals.***

We depend on theprincipal members of our scientific and management staff. The loss of theseprincipal members’ services might significantly delay or prevent theachievement of research, development or business objectives and couldmaterially adversely affect our business, financial condition and results ofoperations. We do not maintain key person life insurance on any of theseprincipal members except for the CEO. We have entered into executive employmentagreements with key members of the management team that provide forcompensation and other benefits in the event these persons are terminated otherthan for cause, including in connection with a “change of control” ofAcusphere.

Our success depends, in large part, on our ability toattract and retain qualified scientific and management personnel such as theseindividuals. We face intense competition for such personnel and consultants. Wecannot assure you that we will attract and retain qualified management andscientific personnel in the future. In order to attract, retain and motivatehigh caliber employees in a competitive environment, stock options are animportant part of our compensation program.  As of March 31, 2007, we hadapproximately 0.4 million stock options available for grant under our existingstock option plans. We believe, based upon competitive compensation analysis,survey data and our operating plans, that we will require more stock options. If additional stock options are not available to us, this couldmaterially adversely affect our ability to attract, retain and motivate highcaliber employees as needed to operate the Company. Such shortage of availablestock options would have a material adverse affect on our operating and financialresults.

Further, we expect thatour potential expansion into areas and activities requiring additionalexpertise, such as further clinical trials, governmental approvals, commercialmanufacturing and marketing, will place additional requirements on ourmanagement, operational and financial resources. We expect these demands willrequire an increase in management and scientific personnel and the developmentof additional expertise by existing management personnel. The failure toattract and retain such personnel or to develop such expertise could materiallyadversely affect prospects for our success.

***We will establish collaborative relationships, and thoserelationships may expose us to a number of risks.***

We will rely on a numberof significant collaborative relationships with pharmaceutical or otherhealthcare companies for our manufacturing, research funding, clinicaldevelopment and/or sales and marketing performance. Reliance on collaborativerelationships poses a number of risks, including the following:

·      we cannot effectively control whether ourcorporate partners will devote sufficient resources to our programs or productcandidates;

·      disputes may arise in the future withrespect to the ownership of rights to technology developed with collaborators;

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·      disagreements with collaborators coulddelay or terminate the research and development, regulatory approval orcommercialization of product candidates, or result in litigation orarbitration;

·      corporate partners may have considerablediscretion in electing whether to pursue the development of any additionalproduct candidates and may pursue technologies or products either on their ownor in collaboration with our competitors; and

·      collaborators with marketing rights maychoose to devote fewer resources to the marketing of our product candidatesthan they do to product candidates of their own development.

In July 2004, weentered into a collaboration, license and supply agreement with Nycomed inwhich we granted Nycomed rights to develop and market Imagify in Europe. Therecan be no assurance that the regulatory goals, sales targets and otherobjectives of this agreement will be achieved. Failure to achieve these goals,targets and objectives would result in our inability to receive license,milestone, royalty and other payments under this agreement, which would have amaterial adverse impact on our business, financial condition and results ofoperations including, under certain conditions, reduction of royalty rates,delays in regulatory approvals and product sales, penalties and termination ofthe agreement. Under certain provisions of this collaboration agreement, if wefail in any material respect to use all commercially reasonable efforts tocarry out referenced obligations under the agreement, we would be obligated topay Nycomed liquidated damages of up to $12 million. Although we plan tocarry out all of these obligations, which we believe are in our control, therecan be no assurance that termination of this agreement will not occur or thatsuch termination would not result in us incurring liquidated damages of up to$12 million.  

Given these risks, ourcurrent and future collaborative efforts may not be successful. Failure ofthese efforts could delay our product development or impair commercializationof our products, and could have a material adverse effect on our business,financial condition and results of operations.

***Competition in the pharmaceutical industry is intense, andif we fail to compete effectively our financial results will suffer.***

We engage in a businesscharacterized by extensive research efforts, rapid developments and intensecompetition. We cannot assure you that our products will compete successfullyor that research and development by others will not render our products obsoleteor uneconomical. Our failure to compete effectively would materially adverselyaffect our business, financial condition and results of operations. We expectthat successful competition will depend, among other things, on productefficacy, safety, reliability, availability, timing and scope of regulatoryapproval and price. Specifically, we expect important factors will include therelative speed with which we can develop products, complete the clinical,development and laboratory testing and regulatory approval processes and supplycommercial quantities of the product to the market.

We expect competition toincrease as technological advances are made and commercial applicationsbroaden. In commercializing our initial product candidates and any additionalproducts we develop using our HDDS and PDDS technologies, we will facesubstantial competition from large pharmaceutical, biotechnology and othercompanies, universities and research institutions.

·      Imagify, our cardiovascular drug and leadproduct candidate, if approved for marketing and sale, will compete withnuclear stress tests, the current standard of care in myocardial perfusionimaging. Nuclear contrast agents that are approved for use in myocardialperfusion imaging include products marketed by GE Healthcare and Bristol-MyersSquibb. In 2005, the reimbursement rate of a nuclear stress test wasapproximately $800 per procedure. In addition, GE Healthcare and Bristol-MyersSquibb have developed and marketed ultrasound contrast agents that have been usedfor Left Ventricular Opacification, or LVO, and Endocardial Border Delineation,or EBD, in patients with suboptimal images. No ultrasound contrast agent has been approved by FDA for use inmyocardial perfusion imaging using cardiac stress ultrasound. However, we areaware of other companies that are or may be developing ultrasound contrastagents for use in cardiac stress ultrasound. CardioSphere, which is beingdeveloped by Point Biomedical Corporation, is an cardiac stress ultrasoundcontrast agent for the assessment of myocardial perfusion.  It is our understanding that Point BiomedicalCorporation is working to design and commence a clinical trial in order topotentially gain regulatory approval for CardioSphere.  In addition, some companies have ultrasoundcontrast agents that are FDA approved for resting cardiac ultrasound evaluationof LVO and EBD in patients with suboptimal images or are in development. In thefuture, these companies may seek to broaden their indications to includemyocardial perfusion assessment with cardiac stress ultrasound. TheseFDA-approved agents include Optison, which is marketed by GE Healthcare andDefinity, which is marketed by Bristol-Myers Squibb. SonoVue is an ultrasoundcontrast agent marketed in Europe by Bracco for LVO and EBD and for radiologyapplications.

·     AI-850, our reformulation of paclitaxel, ifapproved for marketing and sale, will also face intense competition.  We are aware of companies, such as AmericanPharmaceutical Partners, NeoPharm and Sonus Pharmaceuticals that are applyingsignificant resources and expertise to developing reformulations of paclitaxelfor intravenous delivery. In early 2005, American

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Pharmaceutical Partners received FDA approval for andis marketing their product. None of these other reformulations has receivedapproval from FDA. Other companies, such as Cell Therapeutics, are developingnew chemical entities that involve paclitaxel conjugated, or chemically bound,to another chemical. None of these new chemical entities have received finalapproval from FDA. In addition, a number of companies have developed technologyfor delivering hydrophobic drugs. Cardinal Health, CyDex and Elan have createdformulations of hydrophobic drugs that have been approved by FDA.

·      AI-128, our initial sustained releaseformulation of an inhaled asthma drug, if approved for marketing and sale, willalso face intense competition. Companies such as Alkermes possess technologythat may be suitable for sustained release pulmonary drug delivery and may havecompetitive programs that have not been publicly announced or may decide tobegin such programs in the future. We are not aware of any other companycurrently in human clinical development of a sustained release version of theasthma drug that is currently the subject of our research and developmentefforts. In addition, many asthma drugs are marketed by large pharmaceuticalcompanies with much greater resources than us. These companies may bedeveloping sustained release versions of their asthma drugs that would competewith our sustained release product candidate.

Relative to us, most ofour competitors have substantially greater capital resources, research anddevelopment staffs, facilities and experience in conducting clinical trials andobtaining regulatory approvals, as well as in manufacturing and marketingpharmaceutical products. Many of our competitors may achieve productcommercialization or patent protection earlier than we will.  Furthermore, we believe that some of ourcompetitors have used, and may continue to use, litigation to gain acompetitive advantage. Finally, our competitors may use different technologiesor approaches to the development of products similar to the products we areseeking to develop.

***We expect to develop international operations that willexpose us to additional business risks.***

We expect, whetherdirectly or through collaborative relationships, to develop operations outsidethe United States in order to market and distribute our products. Regardless ofthe extent to which we seek to develop these operations ourselves or incollaboration with others, we cannot be sure that our international effortswill be successful. Any expansion into international markets will requireadditional resources and management attention and will subject us to newbusiness risks. These risks could lower the prices at which we can sell ourproducts or otherwise have an adverse effect on our operating results. Amongthe risks we believe are most likely to affect any international operationsare:

·      different regulatory requirements forapproval of our product candidates;

·      dependence on local distributors;

·      longer payment cycles and problems incollecting accounts receivable;

·      adverse changes in trade and taxregulations;

·      the absence or significant lack of legalprotection for intellectual property rights;

·      political and economic instability; and

·      currency risks.

**RisksRelated to Our Industry**

***Even if we obtain marketing approval, our products will besubject to ongoing regulatory review.***

If regulatory approval ofa product is granted, such approval may be subject to limitations on theindicated uses for which the product may be marketed or contain requirementsfor costly, post-marketing follow-up studies. As to products for whichmarketing approval is obtained, the manufacturer of the product and themanufacturing facilities will be subject to continual review and periodicinspections by FDA and other regulatory authorities. In addition, the labeling,packaging, adverse event reporting, storage, advertising, promotion and recordkeeping related to the product will remain subject to extensive regulatoryrequirements. The subsequent discovery of previously unknown problems with theproduct, manufacturer or facility may result in restrictions on the product orthe manufacturer, including withdrawal of the product from the market. We maybe slow to adapt, or we may never adapt, to changes in existing requirements oradoption of new requirements or policies.

If we fail to comply withapplicable regulatory requirements, we may be subject to fines, suspension orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions and criminal prosecution.

***Market acceptance of our products will be limited if usersof our products are unable to obtain adequate reimbursement from third-partypayors.***

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Government healthadministration authorities, private health insurers and other organizationsgenerally provide reimbursement for products like our product candidates, andour commercial success will depend in part on these third-party payors agreeingto reimburse patients for the costs of our products. Even if we succeed inbringing any of our proposed products to market, we cannot assure you thatthird-party payors, in the United States, Europe and other markets that we maypursue, will consider our products cost-effective or provide reimbursement inwhole or in part for their use or agree to the proposed price.

Significant uncertaintyexists as to the reimbursement status of newly approved health care products.Each of our product candidates is intended to replace or alter existingtherapies or procedures. These third-party payors may conclude that ourproducts are less safe, effective or cost-effective than these existingtherapies or procedures. Therefore, third-party payors may not approve ourproducts for reimbursement.

If third-party payors donot approve our products for reimbursement or fail to reimburse themadequately, sales will suffer as some physicians or their patients will opt fora competing product that is approved for reimbursement or is adequatelyreimbursed. Even if third-party payors make reimbursement available, thesepayors’ reimbursement policies may adversely affect the ability of us and ourpotential collaborators to sell our products on a profitable basis.

Moreover, the trendtoward managed healthcare in the United States, the growth of organizationssuch as health maintenance organizations, and legislative proposals to reformhealthcare and government insurance programs could significantly influence thepurchase of healthcare services and products, resulting in lower prices andreduced demand for our products which could adversely affect our business,financial condition and results of operations.

In addition, legislationand regulations affecting the pricing of pharmaceuticals may change in waysadverse to us before or after FDA or other regulatory agencies approve any ofour proposed products for marketing. While we cannot predict the likelihood ofany of these legislative or regulatory proposals, if any government orregulatory agencies adopt these proposals they could materially adverselyaffect our business, financial condition and results of operations.

***We may be required to defend lawsuits or pay damages inconnection with the alleged or actual harm caused by our products or productcandidates.***

We face an inherentbusiness risk of exposure to product liability claims in the event that the useof our products is alleged to have resulted in harm to others. This risk existsin clinical trials as well as in commercial distribution. In addition, thepharmaceutical and biotechnology industries in general have been subject tosignificant medical malpractice litigation. We may incur significant liabilityif product liability or malpractice lawsuits against us are successful.Furthermore, product liability claims, regardless of their merits, could becostly and divert our management’s attention from other business concerns, oradversely affect our reputation and the demand for our products. Although wemaintain product liability insurance, we cannot be certain that this coveragewill be adequate or that it will continue to be available to us on acceptableterms.

***Rapid technological change could make our products obsolete.***

Pharmaceuticaltechnologies have undergone rapid and significant change. We expect thatpharmaceutical technologies will continue to develop rapidly. Our future willdepend in large part on our ability to maintain a competitive position withrespect to these technologies. Any compounds, products or processes that wedevelop may become obsolete before we recover any expenses incurred inconnection with their development. Rapid technological change could make ourproducts obsolete, which could materially adversely affect our business,financial condition and results of operations.

***Our products involve the use of hazardous materials, and asa result we are exposed to potential liability claims and to costs associatedwith complying with laws regulating hazardous waste.***

Our research anddevelopment activities involve the use of hazardous materials, includingchemicals and biological materials. We believe that our procedures for handlinghazardous materials comply with federal and state regulations. However, therecan be no assurance that accidental injury or contamination from thesematerials will not occur. In the event of an accident, we could be held liablefor any damages, which could exceed our available financial resources. Thisliability could materially adversely affect our business, financial conditionand results of operations.

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We are subject tofederal, state and local laws and regulations governing the use, manufacture,storage, handling and disposal of hazardous materials and waste products, andwe spent approximately $34,000 during the twelve months ended December 31, 2006to dispose of these hazardous materials and waste products. We may be requiredto incur significant costs to comply with environmental laws and regulations inthe future that could materially adversely affect our business, financialcondition and results of operations.

**RisksRelated to Our Common Stock**

***We expect that our stock price will fluctuate significantly.***

The stock market,particularly in recent years, has experienced significant volatilityparticularly with respect to pharmaceutical and biotechnology stocks. An activepublic market for our common stock may not continue to develop or be sustained.The volatility of pharmaceutical and biotechnology stocks and the level oftrading in the stock does not always relate to the operating performance of thecompanies represented by the stock. Factors that could cause this volatility inthe market price of our common stock include:

·      announcements of the introduction of newproducts by us or our competitors;

·      announcements of clinical trial results;

·      market conditions in the pharmaceuticaland biotechnology sectors;

·      rumors relating to us or our competitors;

·      litigation or public concern about thesafety of our potential products;

·      our quarterly operating results;

·      deviations in our operating results fromthe estimates of securities analysts; 

·      sales by us of additional shares of ourcommon or preferred stock; and

·      FDA or international regulatory actions.

The market price of ourcommon stock may also fluctuate in response to the exercise by us of rightsunder the terms of our 6.5% convertible exchangeable preferred stock. Forexample, we may elect to automatically convert the preferred stock if ourcommon stock price has exceeded 150% of the conversion price of the preferredstock for at least 20 trading days during a 30-day trading period ending withinfive trading days prior to the notice of automatic conversion. There is a riskof fluctuation in the price of our common stock between the time when we mayfirst elect to automatically convert the preferred stock and the automaticconversion date. These fluctuations may adversely affect the value of ourcommon stock.

***If shares under our universal shelf registrationstatement are issued, then the price of our securities may be negativelyaffected.***

We have on file with the SEC a universal shelf registrationstatement on Form S-3 (Registration No. 333-134263) and a universal shelfregistration statement on Form S-3 (Registration No. 333-123854), which providefor the offer, from time to time, of common stock, preferred stock, debtsecurities and warrants up to an aggregate remaining availability ofapproximately $33.0 million and $27.3million, respectively, net of financing amounts previously executed under theseregistration statements and amounts reserved for up to $30.0 million inpotential financing under the equity line of credit arrangement we entered intoin August 2006 with Azimuth Opportunity, Ltd. The SEC declared the shelfregistration statements effective on August 18, 2006 and April 15, 2005,respectively.  Subject to market conditions and our capital needs, and solong as we are then eligible to use the registration statements under SECrules, we may again seek to use any remaining availability under the shelfregistration statements by making an offering of securities covered for saleunder the registration statements. In addition, we may amend our shelfregistration statements or file a new shelf registration statement to increaseour potential access to capital. The addition of these securities into themarket may be dilutive to existing stockholders and have an adverse effecton the price of our securities.

***If we sell shares of our common stock under ourequity line of credit arrangement , then the price of our securities may benegatively affected.***

In August 2006, weentered into what is sometimes termed an equity line of credit arrangement withAzimuth Opportunity Ltd.  The arrangement provides that, upon the termsand subject to the conditions set forth therein, Azimuth is committed topurchase up to $30.0 million of our common stock, or up to approximately 7.6million shares of common stock, whichever occurs first, over the 18-month termof the agreement.  From time to time during the term of the agreement, andat our sole discretion, we may present Azimuth with draw down notices requiringAzimuth to purchase our common stock.  The per share purchase price forthese shares will equal the daily volume weighted average price of the commonstock on each date during the draw down period on which shares are purchased,less a discount ranging from 3.875% to 5.875%, based on the volume weightedaverage price of the common stock.  As a result, our existing commonstockholders will experience immediate dilution upon the purchase of any sharesof our common stock

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by Azimuth under thisagreement.  The sale of shares underthis equity line will be dilutive to existing stockholders and may have anadverse effect on the price of our securities.

***Our significant equity holders may have conflicts ofinterests with us or you in the future.***

As of May 7, 2007, andbased on information provided to us by such entities: Quaker Capital ManagementCorporation and their respective affiliates beneficially own approximately 9%of our outstanding common stock; Bank of America Corporation, ColumbiaManagement Advisors, and their respective affiliates beneficially ownapproximately 8% of our outstanding common stock; the Endowment Capital GroupLLC and its affiliates beneficially own approximately 7% of our outstandingcommon stock; each of Meditor Group Ltd. and MLM Partners and their respectiveaffiliates beneficially own approximately 6% of our outstanding common stock;and each of the Baupost Group LLC and Deutsche Bank AG beneficially ownapproximately 5% of our outstanding common stock. Collectively these investorswill control approximately 46% of our outstanding common stock. Theseinvestors, particularly if they were to act together as a concentrated group,could exert influence over the election of our directors, direct our policiesand operations, including future issuances of common stock or other securities,the payments of dividends, if any, on our common stock, the incurrence of debtby us, amendments to our Amended and Restated Certificate of Incorporation andAmended and Restated Bylaws and entering into of extraordinary transactions,and their interests, as a concentrated group, may not in all cases be alignedwith your interests. This concentration of ownership among a small number ofinvestors may make it more difficult for other stockholders to influencematters requiring stockholder approval and may have the effect of delaying,preventing or deterring a change in control of our company, thereby possiblydepriving our stockholders of an opportunity to receive a premium for theircommon stock as part of any sale or acquisition.

***Our common stock is junior to our preferred stock withrespect to the right to receive payments in the event of a dissolution,liquidation or winding up of Acusphere.***

In February 2005, weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of May 7, 2007, 690,000 of these shares of preferred stock areoutstanding. The preferred stock is senior to the common stock as to liquidation.In the event of our voluntary or involuntary dissolution, liquidation orwinding up of Acusphere, holders of our preferred stock will receive aliquidation preference in an amount equal to $50 per share, plus all accruedand unpaid dividends through the distribution date. Only after holders of thepreferred stock have received their liquidation preference and any accrued andunpaid dividends will we distribute assets, if any are remaining, to our commonstock holders.

***Acusphere could  bethe subject of securities class action litigation due to future stock pricevolatility.***

In the past, when themarket price of a stock has been volatile, holders of that stock have ofteninstituted securities class action litigation against the company that issuedthe stock. The market price of our common stock has been historically volatileand may remain volatile. Such volatility in our stock price could result inshareholder litigation against us.  Ifany of our stockholders brought a lawsuit against us, we could incursubstantial costs defending the lawsuit. The lawsuit could also divert the timeand attention of our management.

***Future sales of common stock by our existing stockholdersmay cause our stock price to fall.***

The market price of ourcommon stock could decline as a result of sales by our existing stockholders ofshares of common stock in the market, or the perception that these sales couldoccur. These sales might also make it more difficult for us to sell equitysecurities at a time and price that we deem appropriate. As of May 7, 2007, wehave approximately 38,481,154 shares of common stock outstanding and 690,000shares of convertible preferred stock outstanding that are convertible intoapproximately 5.0 million shares of our common stock, plus up to a maximumof approximately 0.8 million additional shares of our common stock issuable atour option in satisfaction of the maximum dividend make-whole payment on theseshares of preferred stock. All of the shares of common stock issuable upon conversionof our preferred stock will be freely tradable without restriction under thefederal securities laws unless purchased by our affiliates.

***The terms of our outstanding shares of preferred stock mayrestrict our ability to raise additional capital or hamper or prevent anacquisition of us.***

In February 2005, weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of May 7, 2007, 690,000 of these shares of preferred stock areoutstanding. In the event of our voluntary or involuntary dissolution,liquidation or winding up of Acusphere, holders of our preferred stock willreceive a liquidation preference in an amount equal to $50 per share, plus allaccrued and unpaid dividends through the distribution date. Only after holdersof the preferred stock have received their liquidation

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preference and anyaccrued and unpaid dividends will we distribute assets, if any are remaining,to our common stock holders. Without the vote or consent of the holders of atleast a majority of the shares of preferred stock, we can not authorize or sellany equity security that ranks senior to the preferred stock as to dividends ordistributions of assets upon liquidation, dissolution or winding up ofAcusphere. As a result of this liquidation preference, it may be difficult forus to raise additional capital through the sale of common stock or juniorpreferred stock on acceptable terms, or at all.

In addition, without thevote or consent of the holders of at least a majority of the shares of preferredstock we may not effect a consolidation or merger with another entity unlessthe preferred stock that remains outstanding and its rights, privileges andpreferences are unaffected or are converted into or exchanged for preferredstock of the surviving entity having rights, preferences and limitationssubstantially similar, but no less favorable, to the convertible preferredstock. This provision could hamper a third party’s acquisition of us ordiscourage a third party from attempting to acquire control of us via a merger.

***Under some circumstances, the holders of our outstandingshares of preferred stock may be entitled to elect some of the directors ofAcusphere.***

In February 2005 weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of May 7, 2007, 690,000 of these shares of preferred stock areoutstanding. Cumulative dividends accrue on our preferred stock at an annualrate of $3.25 per share, payable quarterly on the first day of March, June,September and December, commencing June 1, 2005. Any dividends mustbe declared by our board of directors and must come from funds that are legallyavailable for dividend payments. If we have not paid dividends on the preferredstock in an aggregate amount equal to at least six quarterly dividends whetheror not consecutive, we must increase the size of our board of directors by twoadditional directors. After this time, and for so long as these dividendsremain due and unpaid, holders of the preferred stock, voting separately as aclass with holders of preferred stock ranking on the same basis as to dividendshaving like voting rights, will be entitled to elect two additional directorsat any meeting of stockholders at which directors are to be elected. Thesedirectors will be appointed to classes on the board as determined by our boardof directors. These voting rights will terminate when we have declared andeither paid or set aside for payment all accrued and unpaid dividends. Theterms of office of all directors so elected will terminate immediately upon thetermination of these voting rights.

***Provisions of Delaware law or our charter documents coulddelay or prevent an acquisition of us, even if the acquisition would bebeneficial to our stockholders, and could make it more difficult for you tochange management.***

Provisions of Delawarelaw or our charter or by-laws could hamper a third party’s acquisition of us,or discourage a third party from attempting to acquire control of us.Stockholders who wish to participate in these transactions may not have theopportunity to do so. These provisions could also limit the price thatinvestors might be willing to pay in the future for shares of our common stock.Further, these provisions make it more difficult for stockholders to change thecomposition of our board of directors in any one year.

These provisions include:

·      a provision allowing us to issue preferredstock with rights senior to those of the common stock without any further voteor action by the holders of the common stock;

·      the existence of a staggered board ofdirectors in which there are three classes of directors serving staggeredthree-year terms, thus expanding the time required to change the composition ofa majority of directors and potentially discouraging someone from making anacquisition proposal for us;

·      the by-laws’ requirement that stockholdersprovide advance notice when nominating our directors;

·      the inability of stockholders to convene astockholders’ meeting without the chairperson of the board, the chief executiveofficer, the president or a majority of the board of directors first callingthe meeting; and

·      the application of Delaware lawprohibiting us from entering into a business combination with the beneficialowner of 15% or more of our outstanding voting stock for a period of threeyears after the 15% or greater owner first reached that level of stockownership, unless we meet specified criteria.

***We have never paid dividends on our common stock, and we donot anticipate paying any cash dividends on our common stock in the foreseeablefuture.***

We have paid no cashdividends on our common stock to date and, other than cash dividends paid onour preferred stock, we currently intend to retain our future earnings, if any,to fund the development and growth of our businesses. In addition, the terms ofany future debt or credit facility may preclude us from paying these dividends.As a result, capital appreciation, if any, of our common stock will be yoursole source of gain for the foreseeable future.

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**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None

**ITEM5. OTHER INFORMATION**

Our policy governingtransactions in its securities by its directors, officers and employees permitsits officers, directors and certain other persons to enter into trading planscomplying with Rule 10b5-1 under the Securities Exchange Act of 1934, asamended. We have been advised that, in accordance with Rule 10b5-1 and ourpolicy governing transactions in its securities, such a plan has been enteredinto with provisions requiring that any trading of securities thereunderis to be reported when and if it occurs in accordance with applicable law.We undertake no obligation to update or revise the information provided herein,including for revision or termination of an established trading plan. 

**ITEM6. EXHIBITS**
| Exhibit  Number | ** ** | **Exhibit Description**                                                                                                                                                                                                                                        |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                           |
| 10.1            |       | Form of Promissory Note with General Electric  Capital Corporation (Incorporated by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on January 8, 2007)                     |
|            |       |                                                                                                                                                                                                                                                           |
| 10.2            |       | Form of Incentive Stock Option Agreement (2003 Stock  Option and Incentive Plan) (Incorporated by reference to Exhibit 10.1 to the  registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on February 13, 2007)     |
|            |       |                                                                                                                                                                                                                                                           |
| 10.3            |       | Form of Non-Statutory Stock Option Agreement (2003  Stock Option and Incentive Plan) (Incorporated by reference to Exhibit 10.2  to the registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on February 13, 2007) |
|            |       |                                                                                                                                                                                                                                                           |
| 10.4            |       | Form of Incentive Stock Option Agreement (2005 Stock  Option and Incentive Plan) (Incorporated by reference to Exhibit 10.3 to the  registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on February 13, 2007)     |
|            |       |                                                                                                                                                                                                                                                           |
| 10.5            |       | Form of Non-Statutory Stock Option Agreement (2005  Stock Option and Incentive Plan) (Incorporated by reference to Exhibit 10.4  to the registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on February 13, 2007) |
|            |       |                                                                                                                                                                                                                                                           |
| 10.6            |       | Acusphere, Inc. Management Incentive Compensation  Plan (Incorporated by reference to Exhibit 10.1 to the registrant’s Current  Report on Form 8-K, filed with the Securities and Exchange Commission on  March 13, 2007)                                 |
|            |       |                                                                                                                                                                                                                                                           |
| 10.7            |       | Form of Promissory Note with General Electric  Capital Corporation (Incorporated by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on March 30, 2007)                      |
|            |       |                                                                                                                                                                                                                                                           |
| 31.1*           |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                           |
| 31.2*           |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                                       |

 

47

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| 32.1* |   | Section 1350 Certifications |
|-------|--------|----------------------------------|

 

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** filed herewith* 

48

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on this 10th day of May 2007.
|          | ACUSPHERE, INC. |
|----------|-----------------|
|     |            |   |
|     | By:             | /s/ Sherri C. Oberg |   |
|     |            | Sherri C. Oberg |
|     | * *        | *President and Chief Executive Officer* |
|     |            |   |
|     | By:             | /s/ John F. Thero |   |
|     |            | John F. Thero |
| * * | * *        | *Senior Vice President and Chief Financial Officer* |
|     | * *        | *(Principal Financial  and Accounting Officer  and* |
|     | * *        | *Duly Authorized Officer)* |

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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Exhibit Description**                                                                                                                                                                                                                                        |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                           |
| 10.1            |       | Form of Promissory Note with General Electric  Capital Corporation (Incorporated by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on January 8, 2007)                     |
|            |       |                                                                                                                                                                                                                                                           |
| 10.2            |       | Form of Incentive Stock Option Agreement (2003 Stock  Option and Incentive Plan) (Incorporated by reference to Exhibit 10.1 to the  registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on February 13, 2007)     |
|            |       |                                                                                                                                                                                                                                                           |
| 10.3            |       | Form of Non-Statutory Stock Option Agreement (2003  Stock Option and Incentive Plan) (Incorporated by reference to Exhibit 10.2  to the registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on February 13, 2007) |
|            |       |                                                                                                                                                                                                                                                           |
| 10.4            |       | Form of Incentive Stock Option Agreement (2005 Stock  Option and Incentive Plan) (Incorporated by reference to Exhibit 10.3 to the  registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on February 13, 2007)     |
|            |       |                                                                                                                                                                                                                                                           |
| 10.5            |       | Form of Non-Statutory Stock Option Agreement (2005  Stock Option and Incentive Plan) (Incorporated by reference to Exhibit 10.4  to the registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on February 13, 2007) |
|            |       |                                                                                                                                                                                                                                                           |
| 10.6            |       | Acusphere, Inc. Management Incentive Compensation  Plan (Incorporated by reference to Exhibit 10.1 to the registrant’s Current  Report on Form 8-K, filed with the Securities and Exchange Commission on  March 13, 2007)                                 |
|            |       |                                                                                                                                                                                                                                                           |
| 10.7            |       | Form of Promissory Note with General Electric  Capital Corporation (Incorporated by reference to Exhibit 10.2 to the  registrant’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on March 30, 2007)                      |
|            |       |                                                                                                                                                                                                                                                           |
| 31.1*           |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                           |
| 31.2*           |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                           |
| 32.1*           |       | Section 1350 Certifications                                                                                                                                                                                                                               |

 

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** filed herewith*

50

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